Credit Cards

How do Credit Cards work?

What is a credit card?

A credit card is a physical payment card that allows you to borrow money from a bank or financial institution, to purchase things and pay for them later, either in one go or by instalments.

Joint picture frame and a piggybank

How do credit cards work?

  • You can use a credit card in a similar way to a debit card, making purchases online or in-person.
  • When you receive a credit card, you'll be given an agreed limit you can spend to.
  • If you pay your credit card balance in full each month, you won't pay any 'interest' to borrow the money.
  • However, if you do not pay your card balance in full each month, you will have to pay interest on what you owe, unless you have a special introductory offer from your card provider.

How do you use a credit card?

While using a credit card is similar to using a debit card, they’re more suited to some purposes than others. It’s important to know how to use a credit card before you apply for one.

  • Holidays, hotels and flights. A credit card can help you spread out the costs.
  • Travel credit cards let you make overseas purchases with no fees.
  • Online purchases. You’re often covered by purchase protection when paying by credit card, so they’re a great way to buy things online.
  • Major purchases. Whether you’re building a kitchen extension or planning a dream wedding, you can spread the cost of life-changing purchases.
  • Emergencies. If your boiler goes kaput or your car breaks down, it’s always important to have a cushion for emergencies.
  • Shopping. Some high street shops and supermarkets offer specific rewards and cashback for credit card purchases.
  • Debt consolidation. You can use balance transfer credit cards to consolidate multiple debts into individual payments.

What is a credit card balance?

Your balance is how much you have spent, plus any interest, fees or charges.

So, if you spend £1,000 using a credit card, without any extra fees, your 'balance' will be £1,000.

What does APR mean?

APR – or 'Annual Percentage Rate' – refers to the total cost of your borrowing over a year. It always includes any standard fees, and the interest you would have to pay.

Should I get a credit card?

There are pros and cons to credit cards, so their suitability for you will depend on your circumstances. Applying for one is a personal decision, but independent financial advisors, or the government financial site Money Helper, could be good sources of impartial advice.

How do Credit Cards work? | Credit Cards Guide | NatWest

What are credit cards good for?

  • Spreading out the cost of a purchase.
  • Helping improve your credit score. Using a credit card sensibly, making your card payments on time, could provide a positive credit score boost.
  • Interest free spending. Some credit cards come with a 0% interest period, allowing you to effectively borrow money for free, within a set time period (as long as you abide by the stipulations in your credit card agreement).
  • Some credit cards allow you to earn 'cashback', points or rewards on your spending.
Information Message

How do Credit Cards work? | Credit Cards Guide | NatWest

Some examples of credit card disadvantages

There are potential negative consequences from using credit cards, particularly if you struggle to make payments;

  • Unless you pay off your full balance each month, or you have an interest free offer, you will pay interest on your balance - this is effectively your 'cost' for borrowing the money.
    Borrowing with a credit card, and not paying back what you owe, could cause you to fall into rising debt, resulting in financial difficulty.
  • Not meeting minimum payments on your card, or letting your credit card debt pile up, can negatively impact your credit score. This could make it harder to gain access to credit in the future.
  • A credit card may not always be the most suitable, or cost effective, form of borrowing. Depending on what you're borrowing for, a loan or overdraft could be a better option for you. Learn more about different borrowing options.
  • If you pay more in interest fees and charges than the balance of your card each month, this is known as “Persistent Debt” and you may need to pay back more to prevent you ending up paying interest on a large balance in the long term.


Information Message

How do I apply for a credit card?

  • Want to be prepared before starting your credit card application? 

We'll help you put the pieces together with our 5-step guide on how to get a credit card in the UK.

Questions about credit cards

What is a balance transfer?

A balance transfer is moving a credit card balance from one provider to another, often with a lower (or 0%) rate of interest for a set period. This could help you reduce your monthly payments or clear your debt quicker, but it’s important to note that there may be a fee to transfer a balance and you should consider the costs you will pay when any introductory offer expires. For more information take a look at our guide on what is a balance transfer credit card.

Eligibility criteria applies. Over 18s only

Click to find out more about our Balance Transfer Credit card options

What is a credit score?

Your credit score helps lenders decide whether to lend you money, how much to lend you and how much interest to charge. The higher your score, the better.

Lenders can access a credit file that gives them information about your outstanding borrowing, financial commitments and the way you currently manage any bank accounts, loans and credit cards.

Here's some more information on your credit score and how to improve it.

What is a credit limit?

A credit card limit is the maximum amount you can spend on a credit card. We assess credit limits on a customer-by-customer basis and look at your income, debt level and credit history to make sure that we offer a responsible limit for your credit card spend.

What is a chargeback?

If you have a dispute when you have made a purchase with your credit card, you may be able to make a claim using the Chargeback dispute process or Section 75 of the Consumer Credit Act.

Chargeback allows us to provide you with a refund in a number of circumstances, including:

  • If you do not get the goods or services you paid for, including if the company has gone out of business
  •  If goods or services turned out to be faulty, counterfeit, or defective (you may need to return the goods in order to get a refund in this case)
  • If you are charged the wrong amount, or charged twice by mistake
  •  If you are charged for a repeat payment after cancelling a subscription

What credit card payment protection do I get from Section 75 of the Consumer Credit Act?

If you use a credit card to buy goods or services, then the transaction could be covered by Section 75 of the Consumer Credit Act.  This means that your credit card provider and the retailer or supplier may be equally liable for compensating you if something goes wrong. You may be able to make a claim under Section 75 where:

  • the cash price of the goods or services is over £100 but not more than £30,000 (the £100 minimum amount applies to each item or set of items that you buy rather than the total bill- so for example, if you bought two items that together cost more than £100, but each cost less than £100, Section 75 would not apply)
  • all or part of the purchase was made using a credit card (even if it is just the deposit)
  • there has been a breach or misrepresentation of your contract (i.e. where the goods or services were not as described, were faulty or were not received at all) or
  • the retailer or supplier goes into administration before you've received your goods or services 

Unfortunately, Section 75 of the Consumer Credit Act was intended to apply to private individuals, sole traders and partnerships only. Claims made by companies and limited companies are not covered under Section 75 of the Act.

It’s important to note, firstly, that liability under Section 75 arises in certain circumstances., Charge cards are not as classified as credit card, and therefore, is not covered by the terms of Section 75. 

A few more frequently asked questions

Where next?

Borrowing needs calculator Borrowing needs calculator

Our range of credit cards

See our range of credit cards and compare costs, benefits and features. It's all here in one place. Eligibility applies. Over 18s only.

Information Message

Range of credit cards Range of credit cards

Credit card, overdraft or loan?

If you're looking to find out whether a credit card, loan or overdraft is right for you, this is a good place to get started.

Information Message

More beginner guides...

Current accounts for beginners

Learn more about what current accounts are, and other useful information.

Learn the mortgage basics

What are mortgages, how do they work and a host of other useful information.