Credit Card

What Are Credit Cards & How Do They Work?

A Credit card (sometimes referred to as plastic) is a bank-issued payment card that entitles the holder to a line of credit for purchase of goods or services throughout the World.

Credit card customers (known as cardholders) can use the card to purchase online, over the phone or at point of sale. The security system Chip and PIN was until recently required in the UK for the latter, though recently the rise of contactless card payments has become dominant for smaller transactions.

Most credit cards are affiliated with either Visa or MasterCard payment systems.

How monthly card charges work

The cardholder is given the freedom to choose between repaying any amount borrowed on their card, in full, on-time or to pay off that amount over a longer period of time with interest added to the sum owed.

This is where APR comes into the mix: if you do not clear the amount owed on time, the interest you are charged will be based on the APR of your card. The higher the APR of your card, the more you will pay. If you do pay on time, you will not be charged interest at all.

Those who pay off the full balance every month are known as ‘Full payers’ and those who pay over a longer period are called ‘Extended Credit Takers’. Full Payers are rarely profitable for credit card issuers, but Extended Credit Takers are significantly more profitable due to the interest income stream afforded to the credit card issuer.

Late payments will be reported to the credit reference agencies and can result in negative markers on your credit report. You will be allocated a credit limit, which if exceeded may result in further charges and negative information on your file.

When applying for a credit card you will be subjected to a credit search in accordance with the Consumer Credit Act 1974, which determine the outcome of your application.


Q: Does closing a credit card hurt my score?

A: There is no single answer to this as it’s very much open to interpretation by lenders. If you close a credit account that has had a good payment history on it, that will still appear on your credit report for the next six years. Likewise, negative payment information will remain on your report for six years from the date of the account closure.

Some lenders like the perceived stability of a credit account that’s been open for a long period of time, even if it’s been unused, but others might see it as a sign of you not being ‘credit active’.

Q: Can a credit card help my score?

A: Yes. Provided you use your card regularly and keep up with the monthly payments a credit card can help you build your credit history, improving your score and rating. Similarly, using your credit card in a way that results in you defaulting on payments can seriously harm your rating.

Can you get a card with a low score?

Credit cards are available to people suffering adverse credit, however these cards usually have a much higher APR. This is in part to cover the cost of having a customer base that is statistically more probable of defaulting on payments.

Q: Will I be accepted for a credit card?

A: The success of your application will depend on a number of factors, including your affordability (whether you could afford to repay the full credit limit on top of your existing monthly financial commitments) and creditworthiness. It’s impossible to say whether you’ll be accepted for a card unless you apply for one and see for yourself. Even a high credit score doesn’t guarantee you’ll be accepted for a card if you don’t fit the lender’s profile.

For your best chance of getting accepted for credit, check your credit report before you apply. checkmyfile offers the UK’s most-detailed credit report, with data from 4 Credit Reference Agencies, not just 1, so you can see what lenders see. If you haven’t already, you can try checkmyfile FREE for 30 days, then for just £14.99 a month afterwards, which you can cancel online at any time.

Jargon Buster

Use the links below and the resulting list of terms on the right to locate the term you are looking for. If you can't locate it, please get in touch.

A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
X
Y
Z
keyboard_arrow_left

keyboard_arrow_right

We have loads of great customer reviews