Introduction to Credit Cards

Credit cards were first introduced to the UK by Barclaycard in 1966. They offered a way of borrowing money for short periods of time with no interest - at first you had to pay off your bill every month!

It soon became possible to borrow money for as long as you like - subject to interest charges - and the modern credit card was born.

Today, more than 40 years on, credit cards are incredibly widespread and easy to get. There are over 1,500 cards available in the UK, including ones aimed at students, special interest groups and people with bad credit.

How Do Credit Cards Work?

The principle behind credit cards is pretty simple:

• You make purchases with your credit card
• Once a month, you are sent a bill with everything you have bought listed on it
• If you pay the bill in full, you won't pay any interest - making your credit card effectively an interest-free short-term loan
• If you don't pay the bill in full, you will start to pay interest on the amount left unpaid
• This interest is added to your bill every month until you have paid off your balance completely

If everyone paid their bills in full every month, credit card companies would go out of business.

The fact that they make large profits shows just how many people do not pay their credit card bills in full every month. Instead, they use their credit cards as ongoing, flexible loans - usually with quite high interest rates.

What Can I Do With A Credit Card?

The most common use for credit cards is buying goods and services - from shops, on the internet and elsewhere. However, there are a few other things you can do with your credit card as well:

• Withdraw cash from cash machines
• Transfer your balances from other credit cards

Although withdrawing cash with your credit card might sound tempting, it isn't always a good idea. Most credit cards charge interest on cash withdrawals from the instant you withdraw the money - and there are sometimes other withdrawal fees, too.

It's become popular to transfer your balance from one credit card to another in recent years - especially because a lot of credit card companies offer zero or low interest rates on transferred balances.

This means that you can save a lot of money by transferring your existing balance to a new card with a low rate for balance transfers.

Be careful if you do this - low balance transfer rates are sometimes only introductory offers and can increase dramatically when the offer period comes to an end.

Are All Credit Cards The Same?

Needless to say, all credit cards are not the same, although many are quite similar.

Some of the things that differentiate credit cards are:

• Cashback or Reward schemes, based on the amount you spend
• Zero or low balance transfer rates
• Low interest rates for new purchases
• Long-term balance transfer interest rates
• Introductory discounts or 0% interest periods

Some credit cards have more than one of these features but none have all of them. The key to choosing the best credit card for you is to understand how you use your credit card and work out which features you will most benefit from.

Doing this can save you a substantial amount of money, so it's well worth it.