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How does a credit card work?

A credit card works by letting you borrow money from the credit card issuer to buy goods and services.

You then pay the amount you’ve borrowed back either in full, or in monthly instalments. If you don’t repay in full, you’ll also be paying interest.

You’re able to spend up to a certain amount on the credit card. This is known as your credit limit. And your credit card issuer will send you a statement every month with a list of all your transactions.

You’ll have a minimum repayment which you have to make and you’ll also have options of a fixed or full payment. 

What is interest?

If you don’t pay off your credit card balance in full after receiving your statement each month, you’ll be charged interest. The interest will be calculated as a percentage of the amount you owe. 

Some cards offer a 0% introductory interest rate for a certain amount of time when you first get the card. However, once that period is over you'll start to be charged interest if you don’t pay the full balance every month.

There are some transactions which you may still be charged interest on, even if you repay your balance in full each month. These can include cash transactions and balance transactions from the date of the transaction until the payment. Always check your credit card terms and conditions to see what types of transactions you will be charged interest on. 

Why use a credit card?

There are several advantages to having a credit card as long as you use it responsibly. You can:

Spread the cost of large or expensive purchases

Want to book a holiday or buy a new sofa? You can make a purchase and then repay the balance over the course of several months.

Get purchase protection

Under Section 75 of the Consumer Credit Act, you may be protected if you buy anything that costs between £100 and £30,000. If something goes wrong, such as the goods being faulty or the company you bought from going bust, you could get a refund.

Build your credit rating

Having no credit history means that banks are unable to assess how well you can manage debt. A credit card can help you build up a good track record of paying off debt, as long as you make at least the minimum payment each month and stay within your credit limit. When it comes to applying for larger loans like a mortgage, this can help prove you're responsible.

Your credit score may be harmed if you don’t keep to the terms of your credit card agreement.

Prepare for emergencies

A credit card can help cover repairs, or unexpected expenses.

A few things to consider

Before you apply for a credit card, there are some key things to think about.

How you'll handle temptation

With a credit card you may be able to spend more than you’re comfortable with. Before taking one out, consider how you’ll handle any temptation and whether it’s the right option for you. If you decide it is, then you could set yourself some rules for spending. These can be simple things such as to only spend within a certain amount each month, or to only use it for emergencies or big purchases.

Your spending habits

If you’re planning to pay off your balance in full every month, the interest rate may be less of a concern to you.

If you’re going to carry a balance, however, it may be worth looking for a card with the lowest possible interest rate. Keep in mind that you don’t want to be setting yourself up with long term debt – so carrying a debt indefinitely is not what a credit card should be used for.

Fees and charges

Some credit cards charge an annual fee and there may be fees for certain types of transactions, such as cash withdrawals, or making a balance transfer. You could also be charged a fee if you go over your credit limit, or make a late payment. This could harm your chances of getting credit in the future.

Annual Percentage Rate (APR)

APR is the way lenders describe the cost of borrowing money over a year – taking into account the purchase interest rate and fees associated with having the credit card, such as an annual fee. 

When comparing credit cards you can look at the representative APR to get an idea of how much a credit card could potentially cost you. For example, the representative APR for an HSBC Classic Credit Card is 29.9% APR (variable).

Representative examples

Representative examples are what lenders use to show the potential costs associated when advertising a particular credit card. Lenders need to reasonably expect to offer the representative APR (or lower) to at least 51% of successful applicants to be able to advertise this. 

Representative examples will show the representative APR and whether it’s fixed or variable. They’ll also show the purchase rate and whether this is fixed or variable. For example, the representative example for an HSBC Classic Credit Card is based on an assumed credit limit of £1,000. It shows a representative APR of 29.9% APR (variable), and a purchase rate of 29.9% pa (variable).

It’s important to be aware that you may not receive the representative APR when applying for a credit card. The actual APR you’re offered will depend on the lender’s assessment of your personal circumstances. 

Eligibility when applying for a credit card

You can apply for an HSBC credit card if you:

  • are over 18

  • are a resident of the UK

  • have a regular income, typically of at least £6,800 a year before tax

Some credit cards may have additional eligibility requirements, for example HSBC’s Premier Credit Card is only available to HSBC Premier customers.

Before applying for any credit card make sure you’re familiar with the terms and conditions, as well as the eligibility requirements. An application that’s refused may impact your credit score.

You may be able to apply online and then the credit card provider will check your credit history to see if you’re a suitable candidate. The better your credit score is, the more likely you are to have your application accepted.