Baffled by APRs? Confused about credit scores? You're not alone. But credit cards don't have to be complicated. Here are some of the things you need to know…
Put simply, credit is when you borrow a sum of money that you must pay back at a later date.
Credit cards can give you the flexibility to cover surprise costs that come your way – such as plumbing problems or car repairs – should the unexpected happen. Or, you can use a credit card to treat yourself to that special something you've had your eye on.
However you use it, when used responsibly a credit card allows you to spread the cost of your purchases over time, making flexible and convenient repayments based on the amount you choose to repay each month (as long as it's at least your minimum monthly payment).
How do credit cards work?
Once you take out a credit card, you can start to make purchases within your agreed credit limit. Then, you need to make regular payments (or one larger payment) to pay off the balance.
So what makes a credit card different to a loan? Besides varying levels of interest, fees and rewards, each type of borrowing is structured a little differently.
A credit card is a form of revolving credit, which means you can borrow money up to the amount of your credit limit, repay some (or all) of the balance, then borrow again if you wish. You'll normally pay interest on each transaction from the date it's added to your account, until it's repaid.
A personal loan is a little more structured. You'll usually borrow a lump sum, then repay it in equal instalments over a set period of time – with interest added to your repayments.
What is APR on credit cards?
APR stands for annual percentage rate. This is the standard way of showing the cost of borrowing over a year, taking into account the interest that's applied to the money you borrow with your credit card that you'll pay back on top of your balance over the course of the year and any other charges you have to pay for having the card (such as an annual fee).
It's a legal requirement for the APR to be shown on credit cards and loans, so you shouldn't get any unpleasant surprises. But it's important to keep in mind that not everyone will receive the representative APR, which is the APR the provider expects at least 51% of applicants successfully applying for the product as a result of the promotion showing the representative rate to be offered. You'll find out the exact APR you'll pay if your application is approved.
What are the benefits of a credit card?
Unsure whether a credit card is for you? Using a credit card can allow you to: