Operation of a Credit Card
Billions of pounds are spent each month on credit cards by UK cardholders. Credit cards are a popular form of payment, offering financial flexibility and additional rewards for loyal customers. You can use a credit card in three basic ways: to make purchases, to withdraw cash and to transfer a balance. Although there are different types of credit card, they all work in essentially the same way.
Purchases
A purchase transaction is any payment made using your credit card, whether in a store, restaurant, bar, petrol station, online, or anywhere else you may buy goods and services. Purchases can be made in person, via the internet, by telephone or by mail order and are the most popular type of transaction made with credit cards. Currently, purchases account for over eighty percent of all credit card transactions made*.
Cash Advances
You can use your credit card to withdraw cash at Automated Teller Machines (ATMs) or by visiting a branch of your bank or building society, if they are your card provider. A 'cash advance' is essentially a small, instant cash loan that is charged to your credit card account. The cash amount is loaned to you until you have the funds to repay it. Cash advances are instant, emergency sources of money. Any direct money transfer charged to your credit card will also be classified as a cash advance. A direct money transfer is an amount of money that is deducted from your credit card and automatically credited to another bank account, for example your landlord's current account.
There is usually a fee for making a cash advance transaction, and interest will be charged on the amount straight away. This means that if you withdraw fifty pounds, the amount that you have to repay will always be higher than fifty pounds. This is different to a purchase of fifty pounds made using your card: if you pay off your outstanding balance when you receive your statement you will not be charged interest. For more information see Charges and Interest Rates.
Balance Transfers
Another type of transaction which you can make using your credit card is a balance transfer. A balance transfer occurs when outstanding debt from one credit card is moved to the balance of another credit card. Essentially, one credit card pays off the debts on another. Balance transfers can be a useful way to reduce debt: ideally you should move an outstanding balance on a high interest rate card to a card with a low interest rate. Balance transfer is easy to do and there are often nought percent interest rate deals available for new customers. For more information on balance transfers and debt management see Debt Consolidation.
Loyalty Rewards
Some types of credit card come with loyalty rewards. These cards offer bonuses each time you make a purchase with your credit card. Each purchase could ensure a small amount is donated to charity or to your favourite football club, or you may earn points on your card that can be redeemed for discounts or for free goods and services. For more information see Types of Credit Card.
* Based on data from www.bba.org.uk .
