What is a credit card?

A credit card is simply a form of borrowing. The card issuer sets a maximu credit limit and you can spend as much as you like up to that limit provided you repay the minimum amount each month.

How does it differ from other plastics such as debit and charge cards?

A debit card is linked to your bank account. The cost of anything bought with this card, or any money withdrawn with it will be taken from your account almost immediately. It is effectively a plastic cheque. With a charge card, you charge your purchases to the card. But when you receive your monthly statement you are required to repay the outstanding balance in full. You are not allowed to roll over debt into the next month as you can with a credit card. A more recent development is the electronic purse, which you 'load; with money before you go shopping.

What charges do credit cards levy?

Interest is the main charge. You will be charged interest each month on the outstanding balance on your credit card account. Typically, this will be between 1% and 2% irrespective of underlying bank base rates. This is equivalent to an annual interest rate of between 12% abd 24%.

Is interest charged from the day I make a purchase?

It depends. With most credit cards, provided you repay your bill in full ach month, you will pay no interest. This means that you benefit from up to 56 days of interest-free credit from the day you make a purchase to the day payment is due. If you do not repay the debt you will be charged interest on the new purchases either from the purchase date or the date the transaction is put through your account. Some credit cards do not offer an interest-free period. This means that transactions attract interest charges immediately irrespective of whether you clear the balance. If you prefer to clear your debts each month these cards are not for you - you are better off with one that offers an interest-free period.

Do interest rates move up and down in line with bank base rates?

In theory yes, but in practice no. Many card issuers are quick to push up their rates if bank base rates rise, but are reluctant to cut them when bank rates fall. Credit card interest rates seldom fall below double digits unless a company offers special short-term teaser rates to tempt people to apply for its card.

Are there additional charges?

Yes. Many companies charge an annual management fee of between £10 and £12 irrespective of how often you use the card, though some will waive it once you have spent a certain amount.

Many credit card companies levy a range of charges if you break the terms and conditions of your card or if you require additional services. Exceeding your agreed borrowing limit or being late with a monthly payment usually incurs a fixed penalty fee. The credit card issuer will apply a charge if you request an additional monthly statement or a second card for a partner, if your cheque or direct debit to clear any of your outstanding balance returns unpaid or if you use your card overseas.

Credit card companies cannot simply apply extra charges willy-nilly. When you obtain your card, the issuer will send you a booklet setting out the credit card's terms and conditions and details of any extra charges will be included. It is vital that you read the booklet thoroughly and keep it in a safe place. Some card issuers detail the charges they can levy in the reverse of your monthly statement.

How much do I have to repay each month?

Most credit card issuers stipulate a mininum payment of £5 or 5% of the outstanding balance on the card account. But remember that any uncleared balance will attract interest charges. Every month, your card issuers will send you a statement detailing transactions on your account and the outstanding debt. It will also include details of the minimum payments required and the date by which should be paid. You make the payment by post or at your local bank, though the bank may charge for this service.

How much can I spend on my card?

The card issuer will set a limit when it assesses your initial application. Usually, after six months it will review the limit and may increase it. It will usually inform you of a new spending limit by writing to you or by a note on your regularly monthly card statement. But do not simply regard an increase in your limit as a license to spend - you still have to repay the money eventually and pay interest on thedebt in the meantime.

Can I have any credit card I choose?

Yes, you may apply to any card issuer. Some recent players on the UK credit card scene, such as US companies Capital One Bank and People's Bank Connecticut offer more attractive rates than traditional card providers such as Barclaycard. Today there are about 1,300 brands of credit card in the UK, offered through more than 30 credit issuers.

When you apply for a card, the issuer will first carry out a credit check on you. Your application may be turned down, especially if you have a poor credit record. Amazingly, some issuers have even turned down customers becuase they have never previously held a credit card.