Almost all credit cards work in the same fundamental way. The card is used to borrow and pay back money on a flexible basis, with the account remaining open indefinitely. Minimum monthly repayments are required on debt but the whole balance can be cleared at will. Interest is charged on any debts that are not cleared within the monthly billing period.
The only cards that stray from this modus operandi are prepaid and travel money cards. These require positive balances, with money loaded onto the card before money can be spent.
However, while most of the cards operate in the same way overall, there are many differentiating factors in the specific features of different cards. Credit cards are often marketed by these variables, as they have been categorised in this guide.
Although a particular card may focus on one particular benefit, most offer more than one and usually several. It is the scale of those benefits, such as the length of the interest free period on purchases and balance transfers, that must be compared.
What is a 0% purchases credit card?
Credit card providers often offer a 0% interest rate on purchases for a set period of time. This means you won't have to pay any interest on things you buy directly with your credit card until your 0% deal runs out.
This interest free period can last from a number of months up to two years, as a general rule. This means a 0% period on purchases can be an attractive proposition for paying in instalments for a large purchase such as a holiday or a car. However, it is important that you understand what the additional costs you'll face will be when the interest free period ends if you still have an outstanding balance.
Although you will not be charged interest on your purchases you will still be required to make at least a minimum repayment on your debt each month.
What is a balance transfer credit card?
Introductory interest free periods are often available on balance transfers - as well as or instead of purchases. Therefore, if you have a negative balance on an existing credit card which you currently paying interest on - and you do not intend to pay that balance off in the near future - you can look to take out another credit card with a different bank which offers a 0% period and transfer the balance across.
The interest free periods offered could last from a few months up to two years, during which time you'll pay no interest at all on the balance that you move across.
You'll usually face a one-off charge for transferring a balance - around 2-3 per cent of the total debt. However, this could be a lower overall cost than the interest you'd face on the original card if you aren't planning to pay off the balance in the near future.
Usually you'll have to seek a new provider for your second card as the banks won't allow internal transfers.
Repeatedly moving a balance over to a new credit card account without paying down the debt may be perceived negatively by banks. They may then refuse to offer you financial products in the future or limit you to products with unfavourable terms.
What is a business credit card?
Business credit cards can be used as a flexible means of commercial cash flow for small business owners. They can help a business to remain liquid when faced with delays to receiving payments or an unexpected bill.
Business credit cards work in the same way as personal credit cards but are attached to the business, rather than the individual. The key differences are that with a business credit card the borrowing limit can often be much higher, if desired, and you can usually have multiple cards linked to one account, meaning you can allow employees to use it.
The banks often offer additional business facilities to card holders too, such as discounts on commercial goods and services, business advice, or access to networking facilities.
What is a cashback credit card?
Cash-back credit cards offer a monetary reward on anything you buy using your card. This is usually set at a percentage - often one per cent - of any purchase you make on the card. The offer will usually be capped at a maximum monthly return and may only run for a limited time
The cash-back is normally limited to purchases made using the card, as opposed to cash advances or balance transfers.
The cash-back you earn will be credited to your account - either in the monthly statement period following the month you spend in or at a pre-determined point in the future.
What is a rewards credit card?
Banks and other credit card providers often offer a range of different reward schemes for customers that use their cards.
Credit card providers sometimes have tie-ins with commercial partners like supermarkets, high street shops, entertainment companies or leisure chains. Card holders will typically earn points or cash-back every time they spend money on their credit cards, and will be able to use those rewards as discounts for services from those companies.
Free or discounted memberships with associations and clubs are also commonly offered as perks. With some cards you may be able to access exclusive services such as early booking for ticketed events.
Ensure the rewards on offer aren't the only thing you consider when choosing a credit card. You could face a higher interest charge or a service fee which outweighs the benefits.
What is an air miles credit card?
Some credit cards offer 'air miles' as a reward for spending on the card. These air miles - such as those used through the Avios system - can be used towards the cost of flights.
Sometimes the points have to be redeemed with specific airlines. In other cases there could be a few you can choose from. Some cards offer further travel benefits such as insurance, access to luxury airport lounges, or priority upgrades.
What is a credit building credit card?
If you've previously experienced debt problems you might have difficulty in securing a credit card or other financial products through conventional channels such as high street banks or building societies. You could find that you're applications are denied or that you are only offered services with unfavourable terms.
However, many of the banks, as well as niche providers, offer credit cards that are specifically designed for people with poor or under-developed credit histories. The providers may even offer these to people that have had county court judgements against them or that have been declared bankrupt in the past, as well as those that have not held credit products in the past.
As well as providing the core credit facility, these cards are often designed to help people to improve their credit profile. They sometimes offer low initial credit limits which increase at set intervals if the account is maintained within the terms and conditions.
Simply operating the account correctly may also indicate to other providers that you are able to manage debt correctly, increasing the chance of being accepted for mortgages and loans in the future.
These types of credit cards often carry interest rates that are many times higher than the market leading offerings.
What is a store card?
Store cards work in a similar way to credit cards but their use is usually limited in the specific outlets you take the card out with. Sometimes they can also be used with affiliate organisations of the issuing outlet.
If you use the card to make purchases in the store you will have an unspecified time to repay the debt but will be charged interest while the account has a negative balance. You will need to make a minimum monthly repayment but can repay the entire balance at your leisure. Store cards often reward holders with discounts on purchases.
What is a charity credit card?
Charity cards work in a similar way to cashback credit cards, except a designated charity profits from the cash-back arrangement rather than the card holder.
Every time the card is used to make a purchase, a percentage of that purchase will be sent to the charity. The total reward may be subject to a monthly cap, but the arrangement will usually remain in place indefinitely.