How do Credit Cards work?

15 Sep

Credit Cards are sometimes referred to as plastic money. Almost everyone in the UK will have some type of payment card and they are probably one of the most popular financial products in the world. Cards are convenient, easy to use and are much safer than carrying around large sums of cash. As the preferred method of spending for millions and with worldwide acceptance you can use credit cards to make payments over the internet, in shops, restaurants and other outlets. There are a large variety of credit cards available in the UK.

With a credit card you are given a line of credit which essentially means that you are borrowing money. All credit cards have a set credit limit which is the maximum amount of credit you can spend. This is predetermined by the card provider and is based on your individual situation. Generally speaking, the better your credit history, the more credit you are likely to be given.

Credit cards record each purchase you make and then the card provider will send you a monthly bill for everything that you bought. You then have to pay back the credit amount that you have used. Whenever you borrow money, in order for the lenders to profit, you will have to repay the amount that you borrowed plus an additional interest. When you take out a credit card you are given an interest rate. This rate is usually given as the total percentage that you will pay over the year and is known as the Annual Percentage Rate or APR.

Credit cards ultimately give you more financial freedom. They allow you to pay for expensive purchases in small monthly instalments, meaning that you can afford to buy things without taking out a loan. Also, so long as they are used correctly they are a great way to pay for something that is perhaps more than the amount of money that you actually have. Using a credit card correctly and ensuring that you make payments on time can help improve your chances of future borrowing. Credit cards are also very secure because your purchases are usually better protected than with other types of cards. Furthermore, your purchases are usually insured.