How do Credit Cards work?

The representative example is a tool that lenders use to help you compare the cost of borrowing in a simple format. It shows you all the important costs in one place.

First is the purchase rate - the interest rate you’d be charged when buying most goods or services on the credit card. If you pay off your balance in full every month, you will not be charged interest. Interest free credit cards offer you a window where you can borrow money without paying interest, often for an introductory period.

You’ll also see Representative APR, which is the annual percentage rate that’s used to indicate the full cost of borrowing.

Next, you’ll see the assumed credit limit - a guide limit that all banks need to quote to allow you to compare different cards. We tend to use £1,200 as a guide, but that's unlikely to be the exact credit limit you get when you apply.

It's important to understand that most banks will treat your application on an individual basis, which means the rate and terms you ultimately get will not always be the same as the rate you see before you apply.

There are various types of credit cards, which can be overwhelming - let's show you the ropes.

Incentive based credit cards

It's always nice to be rewarded. That's why some credit cards offer incentives in return for spending money. This might be a good option if you like to repay your balance in full every month. However, you should always consider the interest rate and any additional fees, alongside any incentive.

See our guide on cashback credit cards.

0% credit cards

Some credit cards offer an introductory 0% interest rate on purchases or balance transfers, and sometimes both.

0% balance transfer credit cards let you transfer your outstanding credit card balance from your current card to a new one, and you won’t be charged interest on that amount for a set period (as long as you keep up with your monthly repayments).

0% purchase credit cards let you spend without paying interest on purchases for a certain period of time. After that, you’ll be charged interest on any outstanding balance.

Travel benefit credit cards

Some credit cards also offer additional travel benefits, like no foreign transaction fees or additional insurances. This may be advantageous if you like a jaunt overseas now and then. Learn more about travel credit cards.

Low rate credit cards

Low rate credit cards could save you money in interest when making purchases. That's always a good thing, but remember to consider the APR associated with each card to understand the overall cost for comparison.

Annual fee credit cards

Some cards may charge an annual fee for access to additional benefits. A no annual fee credit card does not require you to pay a yearly fee, but you may still be charged other fees such as a balance transfer fee or late payment fee.

You can use most credit cards when you’re abroad, but be aware of foreign transaction fees that can occur on purchases you make with your card.

If you want to manage your spending while you’re overseas, you could look at a travel credit card. The benefit of most travel cards is they don’t charge foreign transaction fees. Learn more about travel credit cards and how they work.

If you’re an existing customer and decide cancelling is the best option for you, it’s an easy process. Simply get in touch with our Credit Card Services team who will be able to discuss your options further to help you make an informed decision that is right for you and your finances.

When cancelling a credit card you need to make sure that:

• You have paid off the card
• You have considered your credit score before cancelling and that you’re not in the process of applying for any new forms of credit before you cancel