Credit cards are a method of borrowing money. They work like your bank card allowing you to spend in shops, on the phone and online. With some cards you can withdraw money from cashpoints as well. Typically credit cards will come with a limit of how much you can borrow.
Just the same way as your bank card works, when you use your card in stores, information about your card and whatever you are paying for is sent to the shops’ bank. Next, the shop’s bank checks your details with your card issuer to guarantee they will be paid. Finally your four digit Personal Identification Number (PIN) authorises and completes the transaction.
You will receive a monthly statement outlining how much you have spent on your credit card and what payment is due. Ideally, you should attempt to pay off the balance you’ve spent each month in full. However, there is a minimum amount which you can pay, usually 2 -5% of the balance each month. The remainder of the balance you have not paid will have interest applied to it which you will have to pay. So it follows the more of your balance you pay, the less interest you will have to pay each month.
The advantage of using a credit card is that you can essentially borrow money for free if you always pay your balance in full each month.
Credit cards are also a safe way to make purchases everywhere in the world. They also offer protection against large purchases. Should you spend anything between £100- £30,000 on a product which is not delivered, it will be covered by insurance so you don’t lose your money.
Credit cards also provide protection against fraud so if a criminal steals your details and makes purchases with them you will not have to pay.
Additionally, a variety of credit cards offer rewards to customers for using them, so you can earn cashback or even airmiles if you use your card responsibly.
The downside of having a credit card is the potential to incur debt should you fail to keep up with monthly repayments.