Credit Cards

Understanding Credit cards

The different types of Credit Cards

Credit card issuers offer a variety of features to attract you to their cards ahead of others. Credit cards are often designed with a specific purpose in mind, so the right credit card for you will depend a lot on how you want to use it. A lot of cards have 0% introductory rates for new customers, on balance transfers, purchases or a combination of both. Other credit cards will offer rewards on your spending, like shopping points or cashback, or no fees and charges for using your card abroad.

There are also specific cards designed to help you build your credit score if you are new to credit cards or have had difficulties in the past. Credit cards can be issued by banks such a Halifax or NatWest, but are there are some online only credit cards, such as Creation or Capital One, it’s worth doing your research to make sure you get the best card to suit your needs. Try our credit cards guide to see more information about the different types of credit cards.

What do different credit card offers mean?

A 0% or zero interest credit card gives you a set period during which you won't have to pay interest on a specific type of balance - the most common being an introductory interest free period on either balance transfers or new purchases. A rewards credit card will give you something back for using your credit card, such as airmiles or shopping points you can collect and redeem for discounts in the future, or a straight cashback as a percentage of your eligible spending.Some of the credit cards are called Platinum cards, these aren’t necessarily any different to standard credit cards, but are generally more exclusive.

What are the benefits of having and using credit cards?

Credit cards can be a great tool when used correctly, but you have to make sure you use them sensibly - only spend what you can afford and use the right credit card for the right purpose. As well as offering the chance of interest free borrowing and extra rewards from your shopping a credit card will offer you extra protection as a consumer if something goes wrong with your purchase. Read our full guide to the benefits of credit cards

Credit Profile

Your credit profile, often referred to as your credit score, will play a big part in determining what credit card you are likely to be accepted for. When you apply for a new credit card the issuer will evaluate your application, and will use your credit profile to decide;

a) whether they want to accept or decline your application

b) if they do accept you what APR you will be offered, and what your initial credit limit will be

Q: What exactly is a credit profile?

A: Your credit profile is a file that is held by a central bureau in relation to your history with credit products. Each person with any form of credit history will have a file, as will businesses that access credit. All lenders of various products such as mortgages, loans and credit cards report information on their customers to the bureau around how a particular customer is managing their account. These records then remain on your file, even after an account has closed or debt settled.

Read our guide to how your credit profile compares to the rest of the country

Glossary of key Credit Card terms

Adverse credit

This term is used to descibe people with a poor credit history. A poor credit history can include previous laon or mortgage arrears, CCJ's or bankruptcy.

Annual Fee

This is a yearly fee charged simply for having a credit card issued in your name. It used to be justified as an “administration” charge. These days, few credit card companies charge such a fee, so your aim is to avoid paying one!

Authorised user

An authorised user is issued their own credit card and has full charging privileges on the main cardholders account but they are not responsible for the repayment of the account balance.

Available credit

Your current credit limit minus your current outstanding balance

Balance Transfer

This is when you move an outstanding balance from one credit card onto another.

Balance Transfer Fee

Sometimes also called a Balance Transfer Handling Fee. This is a charge that is applied if you do move a balance onto your new card. It is usually calculated as a percentage of the balance you wish to transfer, typically it is around 3%. So for example transferring a £2,000 balance onto your new card with a balance transfer handling fee of 3% will incur a charge of £60, this is added to the balance on the card.

Cash Advances

You obtain a cash advance by using your credit card to draw cash. Cash advances will invariably attract interest from the moment they are made, so there is no “interest free” period of grace.

Cash advance fee

You will also be charged for using your card to draw cash. The charge might be made as a flat-rate fee on each withdrawal or taken as a percentage of the amount of cash advanced.

Cash Advance rate

This is the rate of interest attracted by your cash advance. As noted above, interest is invariably attracted from the moment it is made and the rate of interest for this facility could be higher than the card provider’s standard rate on regular purchases.

Cash Back

Cash back offers fall under the general category of “reward” schemes, which are used to encourage you to use your credit card more. Cash back schemes vary widely and can offer between a negligible 0.1% up to 2% cash back on card purchases. Simple arithmetic, however, will tell you that if you start to pay interest on your purchases at a standard rate and the cash back is only 2%, then you are far better off repaying the outstanding debit balance on your card, rather than chasing cash back payments.

Credit Card Issuer/Provider

This is the company who provide the ability for you to use your credit card in shops and online. The three main issuers are Mastercard, VISA and American Express.

Credit Limit

This is the maximum amount that your credit card company will allow as credit i.e. a limit that cannot be exceeded as the balance owing on your credit card.

Credit Rating

A scoring system is used by lenders to determine how credit worthy each customer is.

FSA

Financial Services Authority, regulators of the UK financial services industry.

Interest

The amount you will pay on any money owed.

Interest Free Period

Some cards offer interest free periods which means that you will not incur any interest charges on the money you owe until the period is over. With purchases there is an interest free period between purchasing on your card and the date when you must pay your monthly bill.

Joint Account Holder

Unlike an authorised user a Joint Account Holder has the same borrowing privileges as the main account holder but they too will be responsible for the repayment of the account balance.

Minimum Payment

This is the minimum amount you must pay in any one month in order to meet your credit repayment agreement with the credit card company. The amount of the minimum payment is usually calculated as 2% or 3% of the outstanding debit balance.

Outstanding Balance

Any money owed on your account/card

Foreign usage fee

If you use your card abroad (or to buy in a foreign currency over the internet), most credit cards will charge a currency conversion fee. This is on top of the normal interest attracted by your credit purchases.

PPI

Payment Protection Insurance. This insurance policy offers you cover to pay an agreed amount if you are unable to earn due to illness or redundancy. This cover can help you keep up to date with your card repayments.

Purchases

This is where you pay for goods or services using your credit card – it doesn’t not include things like cash withdrawals, cash advances or money transfers.

Representative APR

This is the most fundamental of all the terms describing your credit card. APR stands for Annual Percentage Rate and is the effective rate of interest, over the year, which reflects all the costs of the credit card, including interest charges and other fees (such as an initial arrangement fee and any annual charge). It is 'representative' as 51% of those accepted for the card have to be offered the advertised APR.

Representative Example

New regulations that came into force on the 1st February 2011 now mean that every credit card advertisement has to include a representative example of the total cost of the credit. The example includes all the required 'standard information' that includes the representative APR, an example credit limit and the rate of interest on purchases after any introductory period has expired.

Rewards

Credit cards with rewards offer you points, discounts or cashbacks that can be earned for using your card for spending. Each issuer that has a reward scheme will have different terms and conditions as to how the rewards are earned, and how you can then redeem them.

Statement

A monthly credit card bill which shows what you have spent on your card during the previous month. It also shows, what you owe, the minimum repayment due and the latest date you can make the payment.

Statement Date

This is the effective date of the statement you will receive from your credit card company summarising all the activity on your account – purchases, payments, credits, charges, any other transactions and the monthly outstanding balance.

Withdrawal Limit

This relates to cash advances and is the maximum you can withdraw, either at a cash machine or over the counter at a bank, in any single day.