Why take out a credit card?
Credit cards are one of the most popular ways of borrowing. You can choose how much to spend within your credit limit and how much to repay each month.
There will always be a minimum payment requirement – usually between 2% and 5% of the amount you owe.
If you don't clear the balance each month, you'll be charged interest on what you've borrowed. You'll also face default charges if you make a late payment or exceed your credit limit, typically up to £12.
Here, we provide a summary of the different credit card types available and who they may be suitable for.
What is a 0% balance transfer credit card?
A credit card with a 0% balance transfer deal allows you to transfer a debt from an existing card on to the new card, which you can then pay off interest-free.
All balance transfer deals charge a fee to transfer the balance – this is typically about 3%, but some cards charge 5%.The longest deal on the market currently stands at 41 months.
It's a great way to minimise the cost of borrowing if you've got existing debt. Once your 0% deal finishes, you'll start being charged interest at the card's standard rate, so you should either repay the balance beforehand or switch to another 0% balance transfer deal.
The Which? Money Compare credit card tables let you search hundreds of deals to help you choose the right card for you based on quality of service, as well as cost and benefits.
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What is an interest-free credit card?
Some cards offer 0% on purchase deals, which charge no interest on purchases for a limited time, with the longest deals now standing at 27 months.
These cards are perfect for spreading the cost of a large purchase, or for making lots of smaller ones, over the interest-free period.
These cards only work if you are disciplined enough to put money aside to repay the debt in full at the end of the 0% period, because otherwise the card will revert to its headline interest rate, which in most cases is reasonably high.
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What is a credit card for bad credit?
Some credit cards are specifically targeted at those trying to rebuild their credit rating (or build one up if they have no credit history).
You should always pay off the bill in full every month as these cards often have a very high APR - anywhere from 25% and up to 60%. They often have a ‘low and grow’ approach, whereby your initial credit limit is very low (say £100-£200), but increases as you prove you can manage it correctly.
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What is a cash back credit card?
Cash back credit cards allow you to earn while you spend on the credit card. This money is paid to your account monthly or yearly.
The standard rate offered typically ranges from 0.25% to 2% of the amount you spend. Some of the best deals on the market also offer a higher introductory rate of up to 5%, though the amount of cash back you can earn is often capped over this period.
Reward credit cards differ from cash back credit cards by giving you points that you can redeem against goods and services, or convert into reward vouchers with a particular retailer.
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What is a prepaid card?
Prepaid cards are not credit cards, as you can only spend funds that are preloaded on to them.
They are commonly used by travellers overseas, as they can be a good way of avoiding the hefty foreign-loading fees often charged by debit and credit cards.
However, there are a few credit cards that don't charge you an extra fee for European purchases and some that are also fee-free worldwide.
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What are 'low-rate' credit cards?
Credit cards with a low standard interest rate (a low APR) make the headlines, but these aren't necessarily the best cards for everyone. For most people, a card for one of the specific uses above is probably a better deal.
This type of credit card is worth considering if you're likely to use it infrequently and won't always pay off the bill in full.
It's increasingly common for banks and credit card companies to use a customer's credit history to set interest rates on their credit card. This means that those with a poor credit history are generally offered a higher interest rate when they apply.
When you use your credit card to buy something costing more than £100 and up to £30,000, you get extra protection under Section 75 of the Consumer Credit Act.
Also, most credit card issuers will send a replacement credit card and cash if yours is lost or stolen while you're abroad. Some promise to get cash in your hand in just an hour.
Which? Money Compare comparison table – Credit cards for everyday spending – compare some of the best deals on the market with Which? Money Compare.