How a credit card works

It‘s important to try to pay off the balance in full every month. But you’ll need to pay off at least the minimum amount. The minimum is set by your credit card provider, but must be at least 1% of the outstanding balance, plus interest, any default charges and the annual fee (if there is one). Most of the time it will be between 3 and 5%.

If you pay off the bill in full, you won’t pay any interest on what you’ve borrowed unless you've used your credit card to withdraw cash. If you don’t pay off the bill in full, you’ll be charged interest. Interest is usually backdated to the date of your purchase.

If you’re worried about forgetting to pay, you can set up a Direct Debit. This is if you can rely on enough money coming into your bank account on the same date each month. This will mean you don’t miss a payment.

Make sure a credit card is right for you

If you already struggle with managing your money or think you might be tempted to overspend, it’s important to avoid getting a credit card. Find out more about managing credit well.

Are you confident about managing your spending and being able to clear your balance every month? Then a credit card can be a good way to buy what you need now and pay for it each month. 

If you’re facing higher living costs, find out about extra sources of income and support in our section Help with the cost of living.

 

Pros and cons of borrowing on credit cards

Pros

• Easy to carry and use – credit cards are accepted at more places than charge cards and prepaid cards.

• Safer than cash – if your card is lost or stolen, just call your bank and cancel it. If it’s stolen and used fraudulently, you’re more likely to get the money back. 

• Might be a cheaper way to borrow – if you pay off your balance in full each month, you won’t pay any interest. Some cards offer an initial interest-free period on purchases. But be aware of when this period ends and if any kind of spending doesn’t count during this time. 

• You’re protected – under something called section 75, you’re protected for most purchases over £100 and up to £30,000. For example, if you book a holiday and the provider goes out of business, the card company should cover the cost even if you only paid a deposit by card. 

• Freebies – these often come with credit cards, such as air miles, reward points and cashback. But it’s important to never choose a credit card because of these benefits. 

• Can help your credit score – sticking to your credit limit and paying your credit card balance in full each month can improve your credit rating. But missing even a single payment can damage your credit record.

Cons

• High-interest payments – if you don’t pay your balance at the end of each month (and you’re not on a 0% deal), you’ll have to pay interest on what you owe. This can be a lot more than other forms of borrowing.

• Beware of debt building – miss just one payment and the interest will start to add up. Unless you pay off what you owe each month, your debt can build up. 

• Can damage your credit score – if you miss a payment or go over your credit limit. This can affect your ability to borrow money in the future. 

• Extra fees – as well as the interest, you could find yourself paying more fees or penalties for exceeding your credit limit or missing a payment. You’ll usually have to pay a higher rate of interest for withdrawing cash and some credit cards might also charge an annual or monthly fee. 

• Deposits and pre-authorisations can cut into your credit limit – some places, such as hotels or car rental firms, might use your credit card to take a pre-authorisation. They’ll put a hold on part of your credit limit – say, £500 – and while it’s in place that amount of credit won’t be available to you. Even after they remove the hold, there might be a few days’ wait until your credit limit is back to normal. 

• Expensive to use abroad – depending on the card. Some are designed for travellers, while others are more expensive when it comes to fees and other charges. This depends on whether you use the card for purchases or cash withdrawals. Shop around to find the best rate cards to use abroad. There’s a range of travel credit and debit cardsOpens in a new window to consider at MoneySavingExpert.

Credit cards in Malaysia operate similarly to those in other countries, but there may be some specific nuances and features unique to the Malaysian banking system. Here's an overview of how credit cards work in Malaysian banking:
 

1. Application and Approval: Individuals apply for credit cards through banks or financial institutions in Malaysia. The application process typically involves providing personal and financial information, including income, employment details, and identification documents. The bank evaluates the applicant's creditworthiness based on factors such as credit history and income before approving the application.

2. Credit Limit: Once approved, the bank assigns a credit limit to the cardholder. This limit represents the maximum amount of credit that the cardholder can borrow using the credit card. The credit limit is determined based on the applicant's creditworthiness, income, and other relevant factors.

3. Making Purchases: Cardholders can use their credit cards to make purchases at various merchants, both online and offline, locally and internationally. The card is swiped, inserted, or tapped at the point of sale terminal, and the transaction amount is charged to the credit card account.

4. Billing Cycle: Credit card transactions are typically grouped into billing cycles, which usually last for about one month. At the end of each billing cycle, the bank generates a statement detailing all transactions made during that period, the total amount owed, the minimum payment due, and the due date for payment.

5. Payment Options: Cardholders have the option to pay off the full balance shown on the billing statement or to make a minimum payment. The minimum payment is usually a small percentage of the total balance, typically around 5%, plus any interest charges and fees.

6. Interest Charges: If the cardholder carries a balance from one billing cycle to the next, the bank will charge interest on the outstanding balance. The interest rate, known as the Annual Percentage Rate (APR), varies depending on the card issuer and the type of credit card.

7. Grace Period: Some credit cards in Malaysia offer a grace period, during which cardholders can avoid paying interest on new purchases if they pay the full balance by the due date. This period typically ranges from 20 to 30 days.

8. Credit Score Impact: Similar to other countries, credit card activity in Malaysia can impact the cardholder's credit score. Timely payments and responsible credit card use can help improve the credit score, while missed payments and high balances can lower it.

9. Additional Features: Malaysian credit cards may offer various additional features and benefits, including rewards programs, cashback incentives, travel perks, insurance coverage, and discounts at partner merchants. These features can vary depending on the card issuer and the type of credit card.

Overall, credit cards in Malaysia provide consumers with a convenient payment method and access to credit, but it's essential to use them responsibly to avoid accumulating debt and negative consequences for one's financial health.