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When it comes to credit cards, there are many benefits to enjoy.
They can help you save, pay off debt faster, and build your credit history. But there are many different credit cards on the market, and knowing their differences will help you choose the best card for your needs.
The difference between a debit card and a credit card is that a debit card is linked to your bank account and allows you to withdraw or use your money when you need to. A credit card is a type of borrowing product.
Credit cards will leave you with a monthly bill that you’ll have to pay on time to avoid additional interest charges and penalties.
But credit cards can be very convenient and helpful as well.
Credit cards can help build up your credit score, offer you an interest-free period, allow you to save fees on purchases, and more. Credit cards may work to your advantage if you avoid late payments, always make the minimum payment, and pay off your credit card balance as soon as possible.
When you're ready to apply for a credit card, your first step is to make sure you meet the eligibility requirements, and for that, you can use an eligibility checker online.
Check your credit report to make sure you have a healthy credit score and that you can afford the monthly repayment.
Let’s take a closer look at the different types of credit cards available, their features and benefits, and how you can choose the best credit card for your personal needs.
Cashback or rewards cards allow you to get a percentage of your spending back in cash or rewards. For example, if you spend £3,000 and get 1% cash back, you'll get £30. With a travel rewards card, a cashback can be paid into your account every month, depending on your credit card company.
Here are some things to look out for when comparing credit rewards:
Consider the minimum spending required to qualify for rewards.
How the cashback is paid, such as an account credit or voucher.
Specific transactions that are not eligible for a cashback.
The eligibility criteria like your credit score and employment status.
Typical cashback rates are around 0.5% to 2% of the amount you spend on your credit card. Some of the best rewards cards will offer more than this - typically an introductory rate of up to 5%.
The best way to use these cards is to avoid borrowing and only spend what you can afford to repay in full every month. Some cards will give you points you can redeem for goods or services.
This is also an ideal card for shopping, as your card transactions may qualify you for rewards and other perks.
A card with rewards is a popular option among frequent spenders, as they can use their card for purchases every day while their reward points add up.
Interest-free credit cards offer 0% interest on purchases for a specific period.
Some of the best interest-free credit cards offer no-interest periods of up to 24 months.
These cards are ideal if you want to make a large purchase and spread it out over a year or two. You can also use it for multiple smaller purchases; just make sure you can repay the amount within the introductory period to avoid any additional interest charges.
These cards work great if you find it easy to put money aside to repay your debt in full by the end of the 0% interest period. If you can't repay what you owe by that time, the card will revert to its standard interest rates, which could be up to 20% APR or more.
With a money transfer credit card, you can move money from your credit card to your checking account to spend as cash.
Transfer credit cards typically come with a transfer fee. Usually, 4% is charged on the balance you transfer to your bank account.
Depending on your credit score, you may be able to get a 0% money transfer offer for an introductory period, which you can use to repay the debt.
These cards work very much like balance transfer credit cards, but the difference is that balance transfer credit cards only allow you to shift debt between cards.
A money transfer card can help you clear a high-interest overdraft or get an interest-free loan for cash-only purchases.
As an example, if you have a 0% money transfer card with a limit of £1,000, you could request a £500 transfer to your bank account. With a 4% fee, that means you'll owe £520 on your credit card and have £500 to spend right away, plus you'll have more than a year to settle the balance.
If you travel a lot or are a frequent flyer, you can be rewarded for your travel purchases with points or other perks, and even avoid international transaction fees. There are various perks you can enjoy with travel credit cards, like airport lounge access, travel insurance, complimentary hotel stays, and concierge services.
Some things to look out for when comparing travel credit cards include:
The introductory offers available.
How many points or miles you can get per £ spent.
Any limits to what points or rewards you can earn.
How and when points can be redeemed.
The interest rate on purchases, balance transfers, and more.
Remember to see if there are any minimum spend requirements to be eligible for rewards and if there are any transactions that are excluded from earning rewards or points.
A 0% balance transfer deal on a credit card allows you to move debt onto another card, which you can then pay off without paying any interest.
Many balance transfer cards offer an introductory period for balance transfers with a 0% APR. This period of time is typically between 12 to 24 months, although some cards offer terms longer than this.
However, it's important to know that these cards typically charge a balance transfer fee which is around 3%. This means you'll be charged up to 3% of the balance that you transfer to the card.
It's a great way to minimise your debt, as long as you can repay your balance within the 0% introductory period to avoid any additional interest payments.
Also referred to as credit cards for bad credit, these cards help you build or improve your credit rating over time. Credit builder cards are ideal for borrowers with no credit history or those wanting to rebuild a bad credit history. These cards typically have lower credit card limits and high interest rates, so you are encouraged to pay off your balance in full every month.
If you get a credit builder credit card, try to repay the bill in full every month as they can often come with high APRs ranging anywhere from 27% to 60%. Your initial credit limit might be very low, about £200 for example, but this will increase if you show you can use your card responsibly.
Low interest rates aren't always the best option for everyone. This type of credit card is an option for people looking to use it infrequently without the need to pay off the entire bill in full.
But keep in mind that banks and credit card providers tend to use your credit history to set interest rates on their credit cards. So, if you have a poor credit history or a low credit score, you may end up paying higher interest rates when you apply.
Before applying for a credit card, it’s important to determine how you want to use it. Do you want to reduce your debt? Do you want to finance a large purchase? Do you want to spend money abroad? Here are some quick tips to help you choose the right credit card:
Help with debt: a 0% balance transfer credit card
Earn rewards: a reward or cashback credit card
Improve your creditprofile: a credit builder card
Make a big purchase: a low-interest or interest-free credit card
Everyday spending: a cashback, reward, or low-interest credit card
Spend money abroad: a travel credit card
These are among the most popular types of credit cards available. Other types of credit cards include business credit cards, charge cards, and student credit cards. You can also get a secured credit card if you have collateral to offer and want to build your credit profile faster.
You can also get a credit card for gas that offers specific rewards when you fill up. This is ideal for people who spend a lot of time on the road or businesses that want to increase their rewards in addition to their other credit card accounts.
Credit card benefits will vary by issuer, so always do your homework and compare credit card fees, benefits, and requirements to find the best credit card deals for you.
Regardless of the type of card you apply for, always make sure that you can comfortably afford the repayments, consider the credit card APRs, and use your card responsibly so you won't end up in a debt spiral. You can choose to use your credit card for emergencies only, or increase your daily spending to benefit from cashback cards and card rewards.
