Credit cards are simply a means of obtaining credit. Credit cards let you choose how much you borrow and how quickly or slowly you pay back the loan.

Compared with most other forms of borrowing, credit cards are very convenient. Once you have a card, you simply use it to pay for goods and services without having to request a new loan each time.

Credit cards are issued by banks, though lots of other organisations - for example newspaper groups and motoring associations - have teamed up with a bank to offer their readers or members an own-brand credit card. The complicated system of making sure credit card payments all reach the right destination is handled by specialist organisations, such as Visa and Mastercard.

 

 

Most store cards work like very much like standard credit cards, except:

- The interest rate is usually higher than credit cards
- Usually there is a small reduction in interest if you agree to pay monthly by direct debit.
- You can use them to buy things only in certain shops;
- You may qualify for special offers, such as discounts and late shopping nights.

 

One word of caution. The special offers might increase the temptation to overspend.

 

Debit cards are entirely different, as rather than lending you money, spending on a debit card is like using cash. Any money spent on a debit card is immediately deducted out of your bank account.

 

 

The most common card types are Mastercard, Visa, and Amex (American Express), although there are several other card types available. Each type has pros and cons depending on how you want to use the card and you should consider a few questions before making your decision on which is the right one for you. One point to consider is whether or not you'll be wanting to use the card in other countries, as some card types are difficult to use in countries where they are not widely adopted. Also, you should consider whether the card type is generally accepted by retailers, if you plan to use the card for regular shopping.

 

 

Each month, you receive a statement setting out what you have borrowed using your credit card. This is made up of your purchases made during the last month using the card, any balance carried forward from the previous month and any interest charged.

 

If you pay off the whole amount you owe, usually there is no interest charge. So, provided you pay off the full balance every month, credit cards give you interest free credit for on average about one month.

 

If you do not pay off the full amount, you are charged interest on the whole lot. Different cards work in different ways, so interest might be charged from the statement date or from the date of each purchase.

 

Each month, you must pay off at least a minimum amount, for example, £5 or 3% of the balance, whichever is greater. If you miss a payment, there may be a penalty charge.

 

A few cards also charge an annual fee.

 

What you pay for a credit card can be expressed as an 'Annual Percentage Rate' or APR. An APR takes into account:

- the interest you must pay;
- any annual fee you must pay;
- when and how often you pay the interest and any fee.

 

You do not need to know how to work out an APR. The important thing is that APRs show the cost of borrowing on a standard basis. So you can compare the APR of one lender with another.

 

The APR also lets you compare the cost of credit cards with other types of borrowing. Of course, a loan with a lower APR is cheaper than a loan with a higher APR.

 

The APR does not take into account charges you might have to pay, such as a charge for missing your monthly repayment.

 

To lure customers away from competitors, many card issuers offer special, low introductory interest rates - for example 1% a year for the first six months or even 0%.

 

Check the small print of these offers carefully. Often, it applies only to any balance you transfer from another card, not any new purchases you make. And, your repayments are set first against the transferred balance, not against new purchases, so you might not get the benefit of the offer for the full six months.

 

 

Credit cards come with a lot of small print. Particular areas to check are:

- What is the period of free credit?
- From when is interest charged, the statement date or the date of purchase?
- Will you be charged if you miss a monthly payment, and if so how much?
- Is there an annual fee?
- What happens if you can't keep up even the minimum payment?

 

 

Although credit cards can be a convenient and cheap way to borrow for a short period, as they usually have a period of free credit (25 to 50 days), they can become an expensive way to borrow over the long-term.

 

Also, because credit cards are so convenient and easy to use, there is a risk of creating debts that you cannot afford to pay back in a short period.

 

With sensible use, credit cards are a very good tool to help you manage your immediate finances, but you should always keep track of your expenditure and make sure you can repay the debts you create through using them over as short a period as possible.

 

 

All major cards offer different types of incentives, interest rates, and fee structures because they recognise that their customers use credit cards in a variety of different ways.

 

 

 

Of course, to make life easier for you, we've put together a dynamic credit card comparison search tool.

 

 

Some of the lenders are now offering an online feature that helps you to decide which of their cards is best for you based on a series of lifestyle and usage questions. Where the company offers this kind of service it is explained in the table, although you might find it handy to try out a few of these as they will help you decide what features are best for you.