Credit Cards: the basics

Understand how credit cards work

Thinking of getting your first credit card? Here are some things to consider.

Credit cards can help you manage your money by spreading the cost of your everyday spending and providing a secure way to pay.

Credit cards are typically used for short-term borrowing for everyday shopping such as groceries and petrol, or for larger purchases such as holidays or a television. A credit card can even be used to consolidate balances from other credit and store cards.

A credit card issuer will run checks on your credit file to see if you can afford to pay back what you borrow on your credit card. This is called a credit check. If you’ve previously had problems paying back your debts then your credit file may be affected. If you think this might be the case, you can contact a credit reference agency and ask to see your credit file.

A Credit Card is not suitable for long term borrowing and a loan may be more suitable.

What makes credit cards useful?

  • If you use them carefully, credit cards can help you spread the cost of your everyday spending
  • There are key differences between credit and debit cards
  • Credit card issuers will give you a credit limit, setting a ceiling on the amount you can borrow
  • You may get some legal protection under the Consumer Credit Act when you use your credit card

Where can I use credit cards?

Like debit cards, you can use credit cards to buy goods in shops, over the phone and online. The process for making a payment will differ depending on how you do it:

  • In a shop: you’ll usually be asked to place your card in a chip reader and enter your PIN.
  • Online: you’ll need to enter your card details, confirm your address and in most cases verify yourself with a password.
  • Online or over the phone: you should expect to be asked for your CVV code. This is a 3 digit code on the signature strip on the back of the plastic.

Using your card abroad

You can use a credit card abroad to make purchases. Look out for the MasterCard®, American Express® or VISA logos depending on your card type.

Most card issuers will charge you a fee to change your purchases from foreign currency back to sterling.

You can also use your card to withdraw cash at a cash machine, bank branch or buy foreign currency (normally called a cash advance). Most credit card issuers will charge you a fee for this and the interest rate for cash transactions is usually higher than the rate for purchases and is typically charged immediately – if you’re not sure you should check your terms and conditions.

What are the differences between debit and credit cards

The key differences are:

  • When you use a debit card the money is debited from your bank account. With a credit card the money you’ve spent on purchases is normally held on interest-free credit until you receive your monthly statement. You can then either pay off the bill in full and not pay any interest, or decide to pay off some of your balance in which case you would be charged interest.
  • Typically you’ll be charged a fee for making a UK cash withdrawal at a cash machine using a credit card, but it’s generally fee-free if you use your debit card. If you withdraw cash using a credit card then interest is usually charged from the date of the transaction and the interest rate for cash withdrawals is usually higher than for purchases.

What protection do I receive when using my credit card?

Credit cards are covered by Section 75 of the Consumer Credit Act 1974.

Under the act, a credit card issuer and the retailer have joint responsibility for your purchase if there is a breach of contract or misrepresentation – for example, if the item is faulty or the company goes bust before you receive your goods. Plus, Section 75 can even give you protection for any costs that you incur as the result of the breach of contract by the retailer.

Certain conditions have to be met for Section 75 to apply, for example, the purchase needs to be over £100 and under £30,000.

Borrowing on your credit card

How much can I borrow on my credit card?

The maximum amount that you’re allowed to borrow on your credit card is called your credit limit. This based on your financial circumstances. The limit is initially set when you apply for your card. It is assessed on a regular basis and can go up or down. Any alteration to your limit is unlikely to happen until after you have had your credit card for 6 months.

Will my credit limit increase?

Typically, after 6 months you can ask for your limit to be increased, and the credit card issuer will make a decision based on how you’ve managed your account or other accounts. They may also use other information they have to assess whether you can afford to repay the increase in debt.

From time to time your card issuer may also offer you an increase without you asking for it. If you’d prefer them not to do this, just contact your credit card issuer, you’ll be able to discuss avoiding forthcoming credit limit increases or even to opt out of all future increases.

When would my credit limit decrease?

Your credit limit can be decreased for a number of reasons. These can include:

  • missing payments
  • going over your credit limit
  • information received by the issuer from credit reference agencies
  • the way you’ve managed other accounts (e.g. current accounts).

If you feel that your credit card limit is too high, then you can ask for it to be decreased by contacting your credit card issuer.

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Important legal information

Lloyds Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 119278. Authorisation can be checked on the Financial Services Register at www.fca.org.ukVisit the Financial Services Authority website (Opens in a new browser window). Lloyds Bank plc is a member of the Financial Services Compensation Scheme and the Financial Ombudsman Service. We subscribe to the Lending Code; copies of the code can be obtained from www.lendingstandardsboard.org.ukVisit the Lending Standards Board website (Opens in a new browser window).

Lloyds Bank plc Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales No. 2065.

Available to Lloyds Bank UK personal current account customers and credit card customers aged 18+ who are registered for Internet Banking. Any cashback earned on credit card purchases will be paid to the primary account holder, so long as they have a Lloyds Bank account with a debit card. You’ll need to stay registered for Everyday Offers and keep your current account open to receive your cashback. Merchant offers and cashback amounts vary and must be activated through Internet Banking. To enter the It’s On Us free draw, you will need to be registered for Everyday Offers for up to a week, and to have activated the It’s On Us offer. From 28 November 2013, 1,000 debit or credit card transactions up to £500 will be reimbursed each week.