There seems to be a small plastic card for everything these days: college ID, driving licence, bank details, supermarket loyalty schemes, you name it! Perhaps one of the most useful you might carry is a credit card (or maybe you have the app on your phone) to make buying easier. But understanding how they work is important for you to stay in control of your spending. Here’s our quick guide to the essentials.

What’s the difference between a credit card and a debit card?

They look almost identical, they have numbers and chips, and you can use either for contactless payments. The most important difference is that a debit card will have been issued by your bank and allows you to instantly access only the money you have in your bank account. Payments by debit card are taken immediately from your account. However, a credit card allows you to borrow money to buy things, that you then must pay back and can incur interest.

How do you get a credit card?

Because it’s like a loan-facility, applying for a credit card is usually a bit more complicated than opening a bank account. You will need to fill in a questionnaire about things like your employment status, where you live and what your monthly rent or mortgage payments are to help the credit card company decide if you are a ‘good’ risk. You will also need to provide documents to prove your ID and address such as passport or current bills, and the company will check to see if you have any credit history. They will use this information to check who you are and to set your credit limit. Card approval processes are getting quicker but it can take a week or so to know if your application for a card has been approved.

Are there different types of credit card?

Credit cards generally fall into two categories: a standard card or a premium card.

• Standard cards simply offer to lend you money to buy things. As an incentive, many cards do now offer some rewards, such as a small percentage cash back on what you’ve spent or travel points.

• Premium cards offer the same loan facility but usually offer much more too, for which you will pay an annual fee just to have the card. These other offers might include special event access or exclusive airport lounge use. If you are going to make use of these perks, it’s worth checking them to see if the annual fee is worth paying.

How do the interest rates work?

Normally if you borrow money you are charged ‘interest’, depending on how much you borrow and for how long. Interest charges mean that you will pay back more than you borrowed, effectively the charge for having that loan. All credit cards must be clear on what their interest charges are, and you will see these displayed as something like “20% APR – annual percentage rate”. This tells you how much interest you will owe on any money that you don’t pay back when it’s due.

Most credit cards will charge no interest if you pay back everything you have borrowed on the due date, usually monthly. This means you have borrowed money free for a month. However, if you spend more than you can afford to pay back, that is when interest charges kick in and you can soon find the amount you owe growing fast.

Things to think about

When you take money from your purse or pocket and wait for change, you have no doubt you are spending your money. When you just wave a plastic card across a machine it is all too easy to forget it is still your money.

Money spent on a credit card is like a loan you will have to pay back. Used wisely, a credit card buys you a few weeks between when you buy something and when you have to pay for it. Used carelessly, a credit card be a quick way to find you owe more money than you can afford.

Read the details on any credit card applications you are considering to understand what the commitment and expectation is. There are many independent comparison websites around than can also help you to compare different credit card companies, to help decide which is right for you.

Many credit cards have additional fees if you withdraw cash or you want to use them abroad, so check before you travel. Although having an internationally recognised credit card can be a real bonus for foreign travel, do make sure you know before you set off how much it might cost you.

Consider setting up alerts to notify you of payment due dates or when you’re getting close to your credit limit. These can help you stay on top of your spending and stay out of debt.

Why would I risk having a credit card?

If you think you might be at risk of spending more than you can really afford, you might feel happier sticking with a debit card. It offers the same ease of payment, after all. However, if it’s the right decision for you, credit cards can offer: • Better consumer protection, particularly for online purchasing, as the money does not come directly from your account and most credit card companies offer great levels of fraud protection. Some also offer warranty and purchase protection on items you’ve bought with the card. • The opportunity to start building your credit history. If you might want to apply for a mortgage or loan one day, demonstrating a healthy credit history by taking out a credit card and paying on-time can help demonstrate in future that you are a good risk for future companies. • Depending on the card, they may also offer other benefits, like free or cheaper travel insurance or collision waivers when renting a car on the card. Do check the small print for details and any conditions.