What is a credit card and how do they work?
A credit card is a financial tool that lets you borrow money from a lender to make purchases, withdraw cash, or pay bills. Instead of using your own funds, you use the bank’s money and repay later, either in full or in instalments.
Using a credit card responsibly can help you build credit, earn rewards in some cases, and manage expenses. However, improper use can lead to debt accumulation and high-interest charges. You should always make sure you can afford the monthly payments on a credit card before you take one.
How do credit cards work? (in simple terms)
Spend now, pay later - you can make purchases that are worth up to your credit limit.
Interest-free period - if you pay off your balance in full each month, you won’t be charged any interest.
Minimum payments - you must pay at least the minimum amount each month to avoid any penalties such as interest fees.
Now here are the details…
What is a credit limit?
When you’re approved for a credit card, the lender gives you a credit limit - this is the maximum amount you can borrow. For example, if your limit is £2,000, you can spend up to that amount. If you try to exceed it, your transaction may be declined, or you might even face an over-limit fee.
What’s the deal with monthly statements?
At the end of each billing cycle (usually 30 days), you’ll receive a credit card statement showing:
The amount you’ve spent
The minimum repayment required
The due date for repayment
You can either pay the full amount (recommended to avoid interest) or pay the minimum amount (but the remaining balance will accrue interest). This is the great benefit of credit cards: you have the flexibility to choose whether or not to pay off your balance in full, or to make use of your line of credit and pay off your balances in installments. Â
At Zable, we let you pick the day of the month for your repayments - and you’ll repay on the same date each month according to your preference - unlike other providers that might change the date according to bank holidays or weekends. We want to give our customers the certainty they need to manage their finances.
How do interest charges and the APR work?Â
Credit cards charge interest on unpaid balances. The rate you pay is called the Annual Percentage Rate (APR). Most cards offer an interest-free period (up to 35 days) - but this is only if you clear your balance in full each month. If you only make the minimum payment, interest is charged on the remaining balance.
Tip: Don’t forget, if you don’t make your full repayment at the end of the month, you will have accrued interest from the date of each purchase, not your statement date!
How does a credit card impact your credit score?
A credit card can improve your credit score if you make on-time payments and keep your credit utilisation low (aim for under 30% of your limit). With a Zable credit card, we let you know when you are eligible for a credit limit increase, which helps with your credit score - which you can track for free in the app. As you build your credit rating with us, you could be rewarded with APR decreases over time, alongside the increases to your credit limit. However, missed payments or maxing out your limit can harm your credit score.
Benefits of using a credit card
It builds credit history - regular, on-time payments improve your credit score.
Interest-free period - if you pay in full every month, you can borrow at no cost!
Protection on purchases - Section 75 of the Consumer Credit Act covers purchases over £100, which means you’ll get your money back in the case of fraud.Â
Are there any risks?
There are some risks associated with using credit, however, if you keep your expenses low and always make your repayments on time - these risks may not apply to you.
High-interest charges - carrying a balance month-to-month leads to expensive interest fees.
Temptation to overspend - easy access to credit can lead to unmanageable debt.
Late payment fees - missing payments can result in penalties and a lower credit score.
If you are looking for a simple credit card, click here to learn more about the Zable credit card and how it can help you manage your finances wisely.
This blog is for informational purposes only and does not constitute financial advice. Please speak to a qualified financial adviser before making financial decisions.