How a credit card works
Improve your knowledge with this in-depth guide from our experts.
What is a credit card?
A credit card can be a simple and flexible way of borrowing money.
Every time you pay with a credit card, you borrow from your card provider to make that payment.
It’s up to you whether you pay off your statement balance in full each month or over time. If you pay it off later, you may be charged interest on what you owe, unless you are in an introductory interest free period. You may also be charged credit card fees.
Watch our video for more information.
Why is a credit card useful?
How can I use a credit card?
How will I be charged when I use a credit card?
As a general rule, credit cards work by charging you in two ways.
Interest
Interest is charged as a percentage of the money you’ve borrowed. But the rate can also vary depending on how you use your card.
Fees
Some fees are standard, such as account fees which certain credit card providers may charge. Some are charges for late payments, cash withdrawals, etc.
Credit card statements explained
As a credit card holder, you’ll receive a balance statement from your credit card provider every single month.
This statement offers a summary of important information regarding your account:
- How much you still owe.
- The purchases you’ve made that month.
- Payments you’ve made to your credit card.
- Your minimum payment for that month.
How do credit card payments work?
With most credit cards, you’re expected to pay at least some of your debt off every single month.
If you pay off all of your monthly spending for purchases before your due date, then you usually won’t be charged interest.
The smallest amount you’re allowed to pay each month is called a minimum payment. Read about minimum payments.
- It’s a good idea to pay off your full balance every month to keep any interest costs down.
- If this isn’t possible, try to pay off as much as you can.
How do credit cards affect my credit score?
Credit cards can affect your credit score in several ways. We typically use three sources of information to build your credit profile:
- Your credit card application - Details submitted by you.
- Your history with us - How you’ve managed any loans, credit, or accounts you have with Lloyds Bank. For example, making all of your credit card payments on time and not missing a payment will help your credit score.
- Information from credit reference agencies - We’ll complete a check on you with our selected credit reference agencies.
Credit scoring is based on the experience we’ve built up with borrowers over many years. Your credit score is personal to you and can alter as your circumstances change.
Getting started online
Let’s look at the details
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More on debit and credit cards
Debit card
A debit card is linked to your bank or building society account. So when you use it, money is taken from your account balance.
Credit card
A credit card, on the other hand, is not connected to your account. When you use it, you’re borrowing the money – with the promise to pay it back in the future.
For a more detailed look at the many other differences, including the charges associated with debit and credit cards, read our full guide.
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How to pick a credit card
- Always plan what you intend to use the card for
Many credit cards have a specific use, so bear this in mind. If your needs change, you may also need to change the type of card you use. - Research a number of options thoroughly
Don’t just look at the headlines such as Representative APR. Read the small print carefully too. - Pick the one that best suits your needs
If you need one that offers a bit of flexibility too, that’s fine. - Think about how much you can repay
Consider how much you can pay off your card and when.
- Always plan what you intend to use the card for
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More on credit limits
The total amount you’re allowed to borrow on a card is called your credit limit.
This limit is set based on your credit score and personal circumstances at the time of applying for the card.
If you’re an existing Lloyds credit card holder trying to find your credit limit, please check either your monthly statement or Internet Banking.
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Using credit cards abroad
Yes, you can use a credit card abroad.
Although the majority of providers will charge you a fee for making a foreign transaction.
With this in mind, always check your card’s terms and conditions so you know what to expect.
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Read more about section 75
Unlike debit cards, credit cards offer consumer protection under something called Section 75.
This applies to most card purchases of over £100 and up to £30,000.
If a purchase goes wrong, your card provider shares responsibility with the retailer and could help you to get your money back.
Key points on how credit cards work
- They can be a flexible way to borrow money and pay off your statement balance over time. With 4 main ways of borrowing: card purchases, balance transfers, money transfers or cash transactions.
- The interest and fees you’ll pay for borrowing can vary a lot depending on how the card is used.
- Credit cards offer some protection for your purchases thanks to Section 75.
- Sometimes a credit card is not the right choice. Explore other borrowing options.
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