How credit cards work

A credit card lets you borrow money up to a set limit and pay it back later. You can use one to buy goods anywhere, including over the phone, online or by post¹. Each month you get a bill: pay the whole balance by the due date and, on most cards, you pay no interest on what you bought; pay less and interest is charged on the whole lot, not just the unpaid amount².

How much borrowing costs depends on the card. Official data put the average interest rate households pay on credit cards at 21.45% in April 2025³, and the amount of interest varies between providers². Credit card rates are high and tend not to move with Bank Rate changes⁴.

This page explains how a card works from end to end: what interest and APR mean, how to avoid interest altogether, how credit limits are set and raised, what reward cards give you, what using a card abroad costs, what happens if you fall behind, and how to complain if something goes wrong.

How a credit card works: borrowing up to a limit and repaying later

A credit card is a form of running credit. The way it works is similar to a bank overdraft: you are given a limit that you can draw up to as and when you need to, provided you pay at least a minimum amount off each month⁸. Unlike a loan, where you receive a fixed sum and repay it on a schedule, a card gives you a pool of borrowing you can dip into repeatedly, up to the limit, for as long as the account stays open.

You can spend on the card almost anywhere: in shops, over the phone, online or by post¹. Each month the card provider sends a statement showing what you owe, a minimum payment and a due date. What you do at that point decides what the card costs. Pay the total amount by the due date and you will not be charged interest¹. If you do not pay back all that you owe when payment is due, you may be charged interest⁹.

Some credit cards have a credit limit, meaning you will be charged if you go over it⁹. You will usually also be charged for going over your credit limit, for using the card abroad and for late payments, so it is worth checking in the credit agreement what other charges apply to the card¹⁰.

Before you get a card, you fill in a form and the credit card provider checks your credit record with a credit reference agency, to see if you are credit worthy¹⁰. Applying for too many cards or regularly switching cards can affect your credit rating¹⁰, so it pays to be selective. The different kinds of card on the market, from balance transfer deals to credit builders, are set out in types of credit card.

A card is not the only plastic option. A store card works on a monthly account where interest is charged if the amount is not paid off in full at the end of the month, like a credit card¹. A charge card is different again: interest is not charged on the amount you borrow, though the balance normally has to be settled in full each month¹. A pre-paid card works in the same way as a credit card, the main difference being that you can only ever spend what is put onto it¹¹. If you are weighing a card against your bank account, see credit card vs debit card.

Before borrowing at all, the rule that matters most is simple: only take out credit when you can pay it back¹². A repayment calculator can work out how long it will take you to repay the balance on your card in full, and what the total cost will be¹³, which is worth doing before you spend rather than after.

Interest and APR: what borrowing on a card costs

The interest charges on credit are called the Annual Percentage Rate, or APR. Generally, the APR will be higher than the quoted interest rate and will show the true cost of the credit¹⁴. It takes into account the total cost of borrowing, including the total amount of interest you will pay, any additional charges such as a monthly fee for taking out the card, and when and how often you must pay the interest². The interest rate of any credit card should be clearly displayed on any application form and promotional material².

One card, several rates. The interest you pay depends on what you actually did with the card¹⁵:

The amount of interest varies between providers, so it is worth comparing cards rather than accepting the first offer¹. Independent analysis compared the fees and interest rates of 137 cards to identify the deals on the market¹⁶, which gives a sense of how wide the choice is.

How much are we talking about? The figures depend on who is measuring, and when:

The trend matters as much as the level. Credit card interest rates remained relatively flat and under the 18% mark between December 2014 and the end of 2017, but have been rising steadily since March 2018¹⁷. Certain types of borrowing, such as overdrafts, revolving credit on your credit card and payday loans, also charge higher interest⁴, and credit card rates tend not to move with Bank Rate changes⁴, so a cut in Bank Rate does not mean a cheaper card.

If you are trying to cut the cost of an existing balance, the options include comparing cards and their costs before taking one out, budgeting before you borrow, switching to a card with a lower rate, paying in full each month, paying on time, paying more than the minimum payment and planning your spending²⁰. A balance transfer moves the debt to a card with a lower rate, usually for a fee; a debt consolidation loan pays off your creditors with money you borrow, then you make monthly payments to pay off the loan instead of your credit cards²¹. The detail of how interest is actually calculated is covered in how credit card interest is charged and credit card APR explained.

Paying in full avoids interest on purchases, but not on cash

The single most useful rule about credit cards: if you pay off the whole balance owed on the card by the due date, you will not be charged interest on your purchases²². Most cards offer an interest-free period on what you have bought if you pay off your bill in full⁵. Provided you pay the bill in full and on time each month, you will not be charged interest²³. If you pay off everything you owe each month, you can often avoid paying interest altogether¹².

The catch is in the wording: "the whole lot". If you do not pay off the full amount every month on a credit card, you will be charged interest on the whole lot, not just the unpaid amount². Leave even a small part of the balance unpaid and interest can be charged from the start on everything you spent that month, not just on the remainder. This is why paying the full balance, rather than just the minimum, makes such a difference to cost: paying off your credit card in full can save you money in interest and charges²⁴.

Cash behaves differently. Interest on cash withdrawals is usually charged immediately, even if you repay your balance in full⁵. There is no interest-free period on cash machine withdrawals or cashback at a till, so a card that costs nothing for purchases can still cost money the moment you use it to take out cash. This is covered in detail in withdrawing cash on a credit card.

Some cards extend the interest-free idea further. Introductory rates are where you start off paying a low rate of interest or none at all, and the rate then increases after a certain amount of time¹⁰. You may be able to borrow interest free, on a 0% interest credit card for example²⁶. These offers are genuine, but the clock matters: when the introductory period ends, the rate rises, so the debt needs to be cleared or moved before then. See 0% purchase credit cards and when a 0% offer ends.

Credit limits: set low and often raised

A credit limit is the most the provider will let you owe on the card at any one time. Go over it and you will usually be charged¹⁰. Limits are not fixed for life, and the direction of travel is usually upwards.

Where you start depends on your record. Credit builder cards, aimed at people with a poor or thin credit history, start with a low limit that is gradually raised as the borrower proves their credit-worthiness²⁷. So a first card, or a card after credit problems, may come with a limit of only a few hundred pounds, rising over time as payments are made.

Rises are not always something you asked for. Research reviewed by the regulator found that an increase in a credit limit is followed by an immediate and significant rise in the credit card debt, averaging between 10 to 14 percent of the total credit limit, on the US accounts studied¹⁹. A bigger limit makes more spending possible, and the evidence is that people use it. Lenders also have the ability to suspend your card to stop you from borrowing¹⁷, so the relationship runs both ways.

If a raised limit is more temptation than help, you can ask for your credit limit to be reduced so you are not tempted to spend more than you can budget for²⁰. This is a request providers are used to, and it is set out in more detail in refusing a limit increase or asking for a lower limit. The wider picture, including what happens when a provider cuts a limit and what that does to your credit file, is in credit card limits.

Reward cards, and the protection paying by card brings

Some cards give you something back for spending on them. Reward cards offer points or cashback, and companies market credit-builder cards as a way to better your credit score and help you get your finances on track²⁸. Air mile cards are one established form of reward card, and independent analysis has compared the fees and interest rates of 137 cards to identify the deals available¹⁶. The trade-off to watch is that reward and credit-builder cards can carry higher rates or fees than plain cards, so the value of the rewards has to be weighed against the cost of carrying a balance. The detail is in rewards and cashback credit cards and credit-builder credit cards.

The other reason people pay by credit card is protection. If you have paid by credit card, you can try to make a Section 75 claim to get your money back²⁹. Section 75 of the Consumer Credit Act 1974 can make the card provider jointly responsible when something goes wrong with what you bought, within the thresholds explained in Section 75: credit card purchase protection.

Alongside Section 75 sits chargeback. A chargeback lets consumers challenge and try to recover payments made using a debit or credit card, although it only applies in certain circumstances³⁰. Some banks and credit card companies offer a chargeback service: they reverse your transaction and you get your money back unless the seller can successfully dispute it³¹. The two routes work differently and are compared in Section 75 or chargeback.

When shopping online, guidance from MoneyHelper sets out how to shop safely and what to check before entering card details²³. If a card is used fraudulently, the circumstances the ombudsman deals with are wide-ranging, from disputed card transactions and cash-machine withdrawals to online banking fraud and identity theft³³.

Using a card abroad costs more

Most credit card companies will charge you a commission charge when you use your card abroad²². You will typically pay up to 2.99% each time you use a credit card, a non-sterling transaction fee on each purchase⁶. On small amounts this adds up fast: spending just £5 with a card that charges fees could set you back £1.15, an additional 23%⁶.

Cash abroad is more expensive still. If you withdraw cash on your credit card abroad you may be charged a foreign transaction fee on top of the usual cash advance fee²², and you will be charged interest on cash withdrawals straight away⁶. That stacks three costs: the cash advance fee, the foreign transaction fee and immediate interest.

For comparison, using a debit card abroad typically involves a spending or cash machine charge of between £1 and £3 each time you use the card, except for euros in the EU³⁴. Neither plastic is automatically cheap outside the UK. The full picture, including whether to pay in pounds or local currency at the till, is in using a credit card abroad and paying abroad: pounds or local currency.

Falling behind on repayments: arrears and what happens next

If you cannot pay the bill, the first thing to do is stop using the credit card you want to pay off. This means the amount you owe stops growing, making it quicker to repay²⁴. It sounds obvious, but a balance that keeps rising cannot be cleared, and interest may be charged on the amount outstanding if it is not paid off¹.

If you cannot pay in full, make sure you make the minimum payments²⁸. Below that, arrears build up. Your credit file will show if you are behind with your payments³⁵, and that record is what other lenders see when you next apply for credit. The consequences of a missed payment, including fees and the loss of promotional rates, are covered in missing a credit card payment.

How repayments are applied matters when you owe at different rates. The most expensive debt on your credit card will always be paid off first²², so if you are paying down a card that carries both a purchase balance and a cash balance, the money you send goes to the costliest part first. How long paying only the minimum takes to clear a debt is explained in minimum payments.

If you are going through financial difficulties and have spoken to your provider, you may be able to request a payment holiday. The process is to speak to your lender first and request the holiday; the provider then makes a decision based on your situation, and they may ask you to provide evidence of your financial difficulty and complete an affordability test³⁶. A payment holiday is not guaranteed, and interest may still build up, so it is a breathing space rather than a solution. Your rights when you cannot afford higher repayments are set out in forbearance rights.

Two further points are worth knowing. Credit card debt is a non-priority debt: repayment of these debts must wait until others have been settled, and if cards are held jointly, any debts will be the joint holder's responsibility³⁷. That second point matters both for couples and after a bereavement, when card debts are handled alongside the estate³⁷. Free help is available: debt advice charities, including those behind help with credit card debt, charge nothing, and the options differ slightly in Scotland and Northern Ireland, which have their own debt processes.

Complaints about a credit card and the Financial Ombudsman Service

If something goes wrong with your card, the route starts with the provider, not the ombudsman. Before the Financial Ombudsman Service can look at a case, a formal complaint must first be made to the company involved³⁸. If you are unhappy with the credit card provider's response, then you can complain to the Financial Ombudsman Service³⁹.

The ombudsman's remit is broad. Consumer credit covers a wide range of credit, lending and borrowing, including payday loans, debt collection, home credit and catalogue shopping, and other types of lending like mortgages⁴⁰. Its guidance for consumers lists bank accounts and bank cards among the complaints it can help with⁴¹. In practice the circumstances are wide-ranging, from disputed card transactions and cash-machine withdrawals to online banking fraud and identity theft³³. It also covers complaints about the affordability of lending and about being unhappy with the quality of goods bought or hired with credit⁴².

Credit card complaints are a significant share of this work. The ombudsman received 5,783 credit card complaints in Q1 2026/27⁷, and its data publications have shown that perceived unaffordable lending has driven complaints relating to credit cards⁴³. In an earlier quarter, credit card complaints reached their highest-ever quarterly level, at 5,660 between October and December 2023/24⁴³.

When it investigates, the ombudsman considers the relevant law, and any regulations and industry codes of conduct that applied at the time, alongside the correspondence, the provider's final response, payment records and your credit file⁴⁴. For some complaint types it asks the business for specific information: for credit broking complaints, for example, it typically expects to see a copy of the application, how the business made its role and legal name clear, fee details and whether the customer's details were passed to another company⁴⁵.

The service is free to use. If a card provider declines a claim, for example a Section 75 or chargeback claim, escalating the case to the Financial Ombudsman is one of the options³¹. You can also complain to the ombudsman about something a credit-repair company has done³⁵. The step-by-step process, including time limits, is in complaining about a credit card provider.