What Is A Credit Card?

We use these plastic or metal cards with magnetic strips to make purchases on ‘credit’.

Updated: March 28, 2024
Matt Crabtree

Written By

Matt Crabtree

Rebecca Goodman

Edited By

Rebecca Goodman


Have you ever watched someone tap a small plastic card when you're at the till, ready to pay for something?

If so, chances are they were using a credit or debit card. Credit cards are now a very common presence in our daily lives, and this has only been reinforced by the rise of online shopping.

But have you ever considered what exactly they are and how they work?

Having a stronger understanding of what's actually happening when you're making credit card purchases can be incredibly useful and it can also help when choosing which credit card to apply for.

In this article, we aim to arm you with the basic knowledge needed to navigate the world of credit cards with a clear head, understanding what makes each type of credit card useful, the pros and cons of using one, and how to watch out for hidden fees. From credit scores to interest rates, we'll be breaking down all you need to know to get by.

Understanding credit cards

Like most people, there's a strong chance you've already got a basic understanding of a credit card, perhaps even owning one or two yourself.

Still, there are numerous benefits for you as a credit card holder when you invest some time in learning more about them.


Let's start with the basics. In essence, credit cards are a financial tool that allow you to borrow a prearranged amount of money from either a bank or financial institution, allowing you to make payments like normal.

Whenever you're using one of these cards to purchase something, you're basically borrowing money from whichever bank issued you the card, meaning you've got to pay it back, plus interest, at a later date.

Now any time you're issued a credit card, it'll always come with what's known as a credit limit — the maximum amount of money you're able to withdraw from your card at any given time.

Before providing you with your card, the financial institution will work out what credit limit to assign you based on a few factors, like your credit score, credit history, income, and other miscellaneous information.

How do credit cards work?

Whenever you make a payment with one of these cards, the bank pays the merchant on your behalf.

The provider then charges you an interest rate, so you'll always have to pay the bank back with an extra charge.

Credit cards can be useful for many reasons, spreading the cost of an expensive item, paying off existing debts, or even building up your credit score. Still, it's worth mentioning the inherent risk that comes along too, not least the potential to stack up debt if used irresponsibly. In addition, you'll also need to watch out for high interest rates, late payment fees, and annual fees.

How do they compare to other payment methods?

Ever wondered what makes credit cards different from other payment methods, like a debit card or cash? Obviously, there's a stark difference when it comes to cash — being the most straightforward and simple way to pay for things.

While they are useful for budgeting, traditional notes and coins don't offer the same benefits you'd expect with a credit card, such as reward points or boosting your credit score.

Debit cards, on the other hand, share many more similarities with credit cards in that they allow you to make purchases without cash. The only difference is debit cards are tied directly to your bank account, meaning you'll never be able to spend outside of the balance you've currently got in your account.

While this can be fairly useful when looking for a convenient alternative to cash, you won't actually be able to borrow money from a financial institution or bank.

What are the various types of credit cards?

In this next section, we'll go over some of the more mainstream options at your disposal when looking to apply for a new card. Each card comes with its own pros and cons, so we'll give each option a fair analysis to help you make a more informed decision.

Kicking things off, let's talk about what makes a rewards credit card special.

Reward cards

Reward cards provide numerous benefits to cardholders — things like cashback, points, or air miles every time you make a payment.

With these rewards, you'll be able to receive various bonuses, like a discount on your next international flight or money into your bank account. Depending on who your rewards credit card issuer is, you might also be able to get travel insurance or fraud protection thrown in.

These cards aren't without their drawbacks though, and some can have high annual fees and complicated reward structures along with high interest rates charged on anything you borrow.

Secured credit card

Secured credit cards require some form of security deposit up front to act as a form of protection on the card issuers' behalf.

Because these cards are normally aimed towards people with less favourable credit scores, the bank or financial institution has to compensate for the added risk that comes with a low credit rating. In this case, the risk is the potential of the user defaulting on their payments.

Since the card issuer has a form of collateral (normally a car, jewellery, or any other valuable item) to minimise the risk on their end, they're often willing to approve a person with any kind of credit rating.

These cards come with fairly high-interest rates and fees, especially compared with the credit card providers that only accept high credit scores. And, since you've got to put down some form of deposit for the banks' protection, there's an unavoidable upfront investment that might not be possible for everyone to commit to.

Store credit cards

Store credit cards are a payment method offered by specific retailers. Though you can only use them at a particular retailer or chain of stores, these cards still offer various discounts and special financing options that might be worth considering if you're trying to ditch cash.

However, these cards tend to have high interest rates if you can't clear the balance and can't be used everywhere.

Travel cards

Do you travel often for work or even just for pleasure? If so, travel cards are designed directly for someone like you, providing holders with various benefits like airlines or hotel points.

In addition, they might even offer perks like airport lounge access or waived foreign transaction fees.

Although these are similar to rewards cards, travel cards, as their name suggests, tend to focus on benefits for travel.

However, travel cards aren't particularly cheap to keep up, and there might be certain restrictions on how your rewards can be redeemed depending on your card issuer.

Balance transfer cards

Designed to help people consolidate and reduce their debts, these credit cards are a game changer for anyone with a high-interest balance across multiple different credit cards. In essence, these cards can be used to collate all of your existing balances, allowing for balance transfers to a new card with much lower interest rates.

These cards provide their users with a 0% APR introductory period so you won't need to pay interest for a certain time period (usually around a year).

Yet after the 0% period, you will pay interest on anything outstanding and there's also a 3-5% charge of the total amount you're transferring over.

Pros and cons of using a credit card

Although we've discussed the benefits and drawbacks of a few specific credit cards, let's take a broader look at credit cards as a whole — are they actually worth the hassle, or are there too many unappealing features about them?


Building credit ✔️

People of all ages tend to use credit cards as a way of establishing and improving their current credit scores. If you make repayments on time, don't use too much of the available credit, and pay off more than the minimum, you should see an increase to your score. We've referred to credit score a lot during this article, but for clarity, this simply refers to a numerical value used by financial institutions to monitor your creditworthiness.

Credit scores play a big role in how easily you're able to obtain various financial products, like loans or credit cards, for example.

Rewards ✔️

Whether it's with a travel, store, or reward credit card, there's a huge opportunity here for stretching your money and saving a few pounds along the way.

Depending on the specific card you opt for, you can expect things like cashback, points, or airmiles whenever you make a payment.

Convenience ✔️

Consumers generally find credit cards as a far more convenient means of making payments for any goods and services.

These cards are also required to follow the Consumer credit Act, meaning you'll be protected for any payments worth £100 to £30,000 that you make.


Potential debt ❌️

One of the biggest reasons people decide to opt for a debit card to make their everyday purchases over a credit card is the implied debt that comes with the latter.

Obviously, you'll become in debt to the bank if you end up spending more than you can afford to repay, and it doesn't stop there — interest charges will accrue on any unpaid balances, so the longer you carry this balance, the more interest you'll end up paying.

High interest rates ❌️

The interest rates you'd typically expect with a credit card are substantially higher than most other types of credit, such as personal loans. As such, it's paramount that you can afford the repayments so you don't end up increasing your debt.

Fees ❌️

There are several fees to be aware of with credit cards, late fees if you're late with a repayment, annual fees, and fees for cash withdrawals. All of these should be detailed in the terms and conditions when you take out a credit card.

How to choose and use a credit card

Throughout this next section, we'll be focusing more on how to decide which credit card best fits your needs and financial situation.

Selecting a credit card

When you're looking to make the first step in selecting your credit card, it's vital to give your current financial situation a proper evaluation so you can avoid certain cards and consider others. Make sure to ask yourself:

  • What type of rewards do I actually want? Cashback, travel points, or something else?
  • What's my current credit score? Most credit cards require at least a “fair“ credit rating, while others, such as a secured credit card, might be available to those with lower scores
  • How much do I plan on using the card, and what's the maximum amount I'm able to pay off each month?
  • Can I afford to make the repayments?

Once you've put a few of the basics to one side, you're now in a much better position to begin researching and comparing different credit card options, knowing that there are certain options you can avoid looking at entirely.

Remember to select the card that most aligns with your personal circumstances, like cashback on your food shopping or travel rewards if you frequently fly.

Using a credit card responsibly

Once you've chosen the credit card that best suits your needs, there are a few things you should keep in mind when it comes to responsible spending and credit building. There are plenty of ways you can use a credit card irresponsibly without even knowing, so it's best to brush up on a few good practices before starting the application process.

Pay your bills on time

We've covered this briefly already, but it's worth reiterating the importance of avoiding late payments if you're trying to avoid credit card fees and a hit to your credit score. Having said this, it's important not to take the opposite approach and pay off your loan too early either.

Depending on the financial institution that issued your loan, there may be an early payment penalty as well, so it's important to double-check what fees are associated with your card regarding payments.

Pay In Full

Ideally, you should aim to pay your balance off in full every month to avoid interest charges.

Using your card wisely

Remember, although you can see the maximum amount of credit you can make withdrawals with, don't be tricked into thinking this is your money. Try to only use the card for purchases that you can afford to pay off quickly, and especially try to avoid it for cash advances or other high-interest transactions if possible.

Monitor your account

Errors can happen all the time, and they're normally very simple to resolve, but it's only you that will suffer if you fail to recognise errors or fraudulent activity on your monthly credit card statement.

Additionally, try to make a point of keeping a low credit utilisation ratio with your credit card. If you're unfamiliar, this refers to the total amount of credit that you're using in comparison to the amount you have available in your credit limit.

This is one of the driving factors that creditors use when adjusting your credit rating, so aim to use no more than 30% of your total funds to avoid appearing overextended to lenders.

How to dispute incorrect card charges

For some additional context on this matter, let's discuss the proper protocol to follow in case you do happen to find any fraudulent or otherwise incorrect charges on your credit card statement.

1. Review your statement carefully

Give your monthly statement a thorough check to see if there are any charges that you don't recognise, and make sure to keep note of the date and total amount of the charge.

If you're struggling to remember the details of a specific charge, try to think back to where you were around the time of the purchase being made.

Obviously, if you were in the house all day and you noticed a transaction made in the city centre, there's something amiss. You might also want to check with any authorised users on your account to see if it was them who made the purchase.

2. Contact the merchant

If you believe that one of the charges on your credit card statement is incorrect, the next step is to contact the merchant. Be sure to have your card statement and any other relevant receipts at hand when you're in contact with them, as you may be asked for details from them.

While you're speaking to the merchant, try to give a detailed account of what has happened and supply them with any evidence you might have to support your claim. While in some cases the merchant may be able to resolve the issue with you directly, you might need to take further action if they're unable to help.

3. Disputing the charge

Contact your credit card provider directly if the merchant can't help you. Make sure you're able to provide your card issuer with any information that might help dispute your charges, like documentation or any correspondence you have with the merchant.

After this, your card provider will start an investigation into the dispute and might even issue a temporary credit to your account to get you by while the investigation is live.

4. Follow up

Now that you've successfully begun your dispute, it's vital to perform regular check-ups with your card issuer to see how your claim is progressing. Around this stage, you might be asked to provide them with a few more pieces of information, so it's important that you do so promptly to keep the ball rolling.

5. Double check your credit report

At this point, you've hopefully heard back from a representative to let you know the dispute has been resolved. Still, it's vital to run a credit report just to ensure that the incorrect charge has been removed and that your credit utilisation hasn't been impacted either.

Security and fraud protection

In today's digital age, credit card fraud and identity theft are growing concerns for consumers. Luckily, credit card companies are taking action to protect their customers' financial security.

Chip technology

One of the most significant advancements in credit card security in recent years is chip technology. Also known as EMV, these cards have a small microchip embedded in them to encrypt all your information, making it much more difficult for hackers to access your data.

This encryption technology is far more secure than the traditional magnetic stripe, which is easier for thieves to clone.

Additionally, chip-enabled cards require a unique authentication code for each transaction you make, so there's an additional layer of security every time you spend.

Two-factor authentication

Two-factor authentication, or 2FA, is another popular security feature used by credit card companies. This feature makes the user require at least two separate forms of identification before allowing access.

For example, whenever you log in to a certain online account, you may be prompted to enter a password and then provide a code that's sent to your phone via text message.

Related guides:


Do annual percentage rates (APRs) on credit cards tend to be stable or unstable?

What is a credit card's annual fee?

How can I establish credit in order to apply for a credit card?

What's the minimum payment on a credit card?

What fees should I be aware of when using a credit card?

What is a cash advance?

What do I do if I can't make my credit card payments?

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