How do credit cards work?

From helping you spread the cost of purchases to allowing you to build up points, rewards, and cashback, credit cards can really come in handy.

However, there are some requirements to consider around how to use a credit card including always making repayments on time and staying within your credit limit. It’s important to know about the interest and any other charges which may be payable, and when fees apply.

Here, we look at exactly how to use a credit card:

A credit card is essentially money that a bank or other finance provider lends you, based on a pre-approved credit limit. As you are borrowing this money, you will need to pay it back.

Before you take out a credit card, your lender will do an assessment, which will include a credit check, to determine how much money to lend you and at what rate. This involves looking at your financial history.

Every month you will receive a statement showing all of your transactions, the minimum amount of money you must pay back, and any interest or fees which have been charged that month.

If you only use your credit card for purchases then you need to pay back the amount you spent on your card in full each month or you will pay interest on the money you have spent based on the variable interest rate set by your lender.

If you are in a 0% promotional purchase plan then you will benefit from 0% interest on your purchases (but you’ll still need to pay back the minimum contractual amount each month).

If you take out cash on your credit card, then you’ll probably be charged interest from the day of the transaction irrespective of whether you pay it off in full at the end of the month. It’s best to check your credit card T&Cs to determine exactly how your lender will charge interest.

Before you apply for a credit card, there are a few key things you need to know.

Many lenders will run a soft credit check to determine your chances of approval, which means you may be pre-approved subject to fraud and anti-money laundering checks. This does not guarantee you will be fully approved for the line of credit however.

If you decide to complete a full application based on your pre-approval, the lender will need to carry out fraud and anti-money laundering checks. A full application may also result in a hard search on your credit report to determine your suitability.

Once these checks have been carried out, a credit card provider will then decide whether to approve you for a card or not, how much money they will lend to you, and what rate of interest you’ll be charged.

This is the amount of money you can borrow from your credit card provider. If it’s £1,200, for example, you won’t be able to spend more than this amount when you use the card, otherwise you may become overdrawn. In some situations, your credit provider may also approve a transaction that takes you over your limit.

You should always try to avoid exceeding your credit limit as this may result in negative consequences, such as fees, increased interest rates and a damaged credit score.

The credit limit on your credit card is set by the lenders and could be based on your credit score, income and other factors. When you have a credit card, the lender will regularly review your credit limit to make sure it is right for you and may increase or decrease based on your circumstances.

You can usually request for the limit to be increased by contacting your provider.

APR stands for annual percentage rate of charge and it represents the cost of borrowing over a year and includes interest and any other mandatory charges which apply, such as an annual fee. Other occasional charges such as cash withdrawal or default fees are not included as they do not apply to every customer.

When you apply for a credit card, a hard credit check may be carried out. This could impact your credit score, as it’s noted on your credit file whenever a hard credit check is made. This may be a red flag to lenders if you make lots of credit applications in a short amount of time. Multiple credit applications could suggest you're having trouble managing your finances.

However, if you use a free eligibility checker, this won’t impact your credit score. In this case, a soft credit check will be carried out to give you an idea if you would be accepted for a credit card or not. A soft credit check may be flagged on your credit record, however it won’t be visible to other lenders. Only you will be able to see a soft search in your report.

A credit card can help you spread the cost of purchases. With our Partnership Credit Card, you can also earn rewards and points on your spending. Representative 28.9% APR (variable).*

Most credit card providers allow you to request a balance transfer. This is the process of moving an existing credit card balance to another credit card with a different lender, subject to approval. Balance transfers can affect your interest free period for purchases, depending on your lender. Carrying a balance means you’ll be charged interest on any new purchases straight away.

It is important to make repayments on time, so setting up a direct debit is a handy way to make sure you remember to pay.
 

*Credit subject to status. 18s and over. UK residents. T&Cs apply. John Lewis plc is a credit broker. NewDay Ltd is the lender. Reward terms apply.

If you’re interested in applying for the Partnership Credit Card we’ll perform a soft search to check your eligibility before you apply. This means it won’t impact your credit score.

Credit subject to status. 18s and over. UK residents. T&Cs apply. John Lewis plc is a credit broker and not a lender.

Content correct at time of writing 16 May 2024. 

John Lewis Money is not responsible for content contained on external websites. This article is for promotional or information purposes only. You must not rely on it as advice. Please contact a financial adviser if you need advice before you apply for a financial product or service.