Credit, debit and other cards
When it comes to spending, borrowing and avoiding charges, each type of payment card has different pros and cons. In this guide we take a look at the main options. Read on for a quick overview and to find out more about a particular card.
Cards for borrowing, cards for spending
There are two main types of card:
- Cards that let you borrow money and pay it back later (credit cards, store cards and charge cards)
- Cards that only let you spend money you already have or within an agreed overdraft facility (debit cards and prepaid cards)
Which one suits you best will depend on your finances, and your personality too – whether you’re confident about paying off your card bills, or whether you feel more comfortable not getting into debt.
“I don’t like borrowing money, but I still pay with my credit card because of the additional protection against fraud that it provides.”
A credit card is a way to buy things now and pay later. You can run up a bill to an agreed limit and pay it off afterwards, usually once a month on a particular payment date.
Who are they for? Only for people with very organised finances – otherwise there is a real risk of spiralling into debt. Even if you set up a Direct Debit to pay the full amount monthly, if you are not on top of your bank balance you could go overdrawn when the payment comes out. They’re available to over-18s only.
- Credit cards give good protection against fraud.
- Credit cards provide extra protection if you have problems with the goods or services you have bought that cost between £100 and £30,000.
- Credit cards provide an easy way to pay for the unexpected.
- If you don’t pay back the full amount there’s usually hefty interest on the money you’ve borrowed.
A debit card is like a direct link to your bank account – when you shop or buy services the money is taken out of your account right away.
Who are they for? Almost anyone with a standard UK current account, though if you plan to use it overseas you should check the charges first.
- There’s no borrowing involved, except if you go into (or over) your overdraft.
- Debit cards have some fraud protection against unauthorised transactions, but not as much as credit cards.
Store cards are a type of credit card you can only use in one chain of shops.
Who are they for? Only a good idea for people who often spend a lot in a particular store, and are absolutely sure they’ll pay off the bill every month.
- They come with deals and discounts in-store.
- There’s a very high interest rate so it will cost you more if you don’t repay in full each month.
A prepaid card works a bit like a gift card – you top it up with money, and you can only spend up to that amount.
Who are they for? Often used by travellers to carry holiday money, and by anyone without a normal bank account – generally kids, teens and people with poor credit ratings.
- Safer than cash, since you can cancel the card if it gets lost or stolen.
- They’re not accepted everywhere, and you may pay fees for using them or for topping them up.
Charge cards work a lot like credit cards – you buy now and pay the money back on your monthly repayment date – but with a charge card you absolutely have to pay off the balance every month. You can’t run up a bill and pay it back later.
Who are they for? Generally only for people on high incomes or for business use. There are also a few basic charge cards, but they don’t have much advantage over credit cards.
- They often come with extra perks such as cashback, air miles or rewards
- If you don’t pay your bill the fees can be much higher than credit card interest – and your card may be cancelled.
Credit builder cards
If you’ve been turned down for a card because you’ve got a poor credit rating, one way of rebuilding your credit history is to use a credit builder card. But you must always repay in full any outstanding balance on time or it could end up making your credit rating worse. This can be either a credit card or a prepaid card.
See recommendations for the best cards to rebuild your credit score on the Money Saving Expert website
There are other things you can do as well to improve your credit rating.