Credit cards offer numerous features and benefits and are one of the most popular financial products in the UK.
What are credit cards?
Credit cards are plastic cards which enable us to pay with credit. Many now offer different and distinct additional features, but they all share this transactional functionality.
How do credit cards work?
Today's credit cards are sophisticated payment devices, which use cutting edge technology to facilitate payments seamlessly. However, besides technology, every credit card that has ever existed has required two essential components - a physical card which users present when they want to make payments, and a credit account held with a bank.
To use a credit card, the cardholder presents their card to the merchant when required to pay. The merchant takes the account details from the card, the cardholder authorises the transaction can be made using their credit account, and the payment processor (Amex, Mastercard, Visa) processes the payment - sending the required funds from the cardholders credit account to the merchant's account.
Before credit and charge cards existed, shopping with credit required accounts to be arranged with different merchants individually. Cheques were available, but they were not widely accepted, as there was no guarantee they would be honoured (credit cards predate cheque guarantee cards). Payment cards simplified credit by enabling users to use a single card with multiple merchants.
Today, credit cards are a multi-billion pound industry and are accepted on every continent, and in almost every country.
What credit card is best for me?
Getting the best credit card is as much an art, as it is a science. Identifying the best deals is relatively easy, we feature a range of tables that help you do just that, but you also need to consider your own personal financial status and lifestyle. This is because you need to be accepted for a card before it becomes useful, and every card issuer has different eligibility criteria. Also, because no card (even a market leading product) can be the best for you, if it does not compliment the way you manage your finances and lifestyle.
Consumers in the UK enjoy one of the most competitive credit card markets in the world. Numerous banks and stand-alone issuers vie for our business with a range of products, each designed to appeal to a particular type of consumer. This breadth of choice can be overwhelming, but credit cards with common features can be quickly grouped into distinct categories, including:
Traditional credit cards
Traditional credit cards, as the name implies, are the most straightforward of credit card products, and most akin to the original credit cards launched in the UK in the 1960s. They tend to be offered to bank account holders, as an alternative payment method, but offer few other benefits.
0% purchase credit cards
0% purchase cards offer their users the ability to spend on their credit card without incurring interest on their balance for an introductory period.
These cards are particularly appealing to those wanting to purchase 'big ticket' items, and who want the additional consumer protection granted to credit card customers by section 75 of the Consumer Credit Act.
Balance transfer cards have been amongst the most popular credit cards in the UK for over two decades. They offer customers the opportunity to transfer their existing credit card balance at a preferential interest rate for a fixed period, after which time it returns to the higher standard APR.
Although balance transfer products are often referred to as '0% cards', users can incur fees to arrange their transfer. Balance transfer fees tend to be charged as a percentage of the total balance transferred, and average around 3%. Some card issuers now offer fee-free transfers on some products (with lower interest-free durations) which can help users avoid any charges whatsoever.
Credit cards for Bad Credit
Of course, not everyone who gets a credit card manages it as well as they should. When people miss or cannot make payments, it reflects poorly on their credit score. A bad credit score makes it harder to obtain credit in the future. However, to rebuild their credit rating, people still need to be able to access credit.
Card issuers have responded with 'credit cards for bad credit'. These products offer low credit limits and high-interest rates (reflecting the increased risk they expose card issuers to), but they are accessible to people with bad credit. This means they can be a useful lifeline to people wanting to demonstrate their creditworthiness, so they can get other credit based products (like mortgages) in the future.
Reward credit cards
Reward credit cards offer users rewards to incentivise credit card spend. The specific rewards differ from card to card but can be broadly divided into three subcategories.
Airmile cards are associated with particular carriers or airline groups and offer people the opportunity to earn points, which they can then redeem for flights, upgrades and other travel related benefits.
Cashback cards offer a percentage of the value of transactions back as cash. Some cards offer increased cashback for an introductory period, with rates tiered to spend after that, while other cards offer different rates of cashback depending on the category of spend (Petrol, Department Stores, Supermarket, etc).
Points based rewards
Before the major UK supermarkets entered the reward credit card market, points-based credit cards required careful management, and a great deal of reading, to maximise their benefit. Cards offering points for supermarket loyalty schemes changed this.
By enabling cardholders to earn extra points for their existing loyalty programs (even when shopping elsewhere), supermarket-based cards transformed abstract points into tangible rewards, that people could use alongside existing points for rewards that were already familiar to them.