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Guide to payment cards

There are three main types of payment card available in the UK: credit card, debit card and prepaid card. Using cards as a payment method can be convenient and is becoming a common alternative to cash and cheques.

Despite looking very similar, they each function differently and offer different advantages and disadvantages. It is important that consumers understand how each card works to ensure they use the one that suits their individual needs.

Credit cards

A credit card provides the cardholders with access to a source of credit. The amount of borrowing available will largely depend on the issuer and the card itself, what the customer applied for and their credit rating.

Credit cards offer flexible borrowing, because as long as the cardholder does not exceed their credit limit or break any terms of the card, they are able to determine how much they borrow for how long and even how much to repay.

The cost of borrowing is calculated by the annual percentage rate (APR); with the average interest rate currently around 19%. However, if purchases are paid in full before the next statement, most credit cards do not incur interest charges. This usually only applies to purchases, not cash withdrawals or balance transfers.

When purchases are not paid in full, the balance will be charged at the standard rate. While this does incur additional charges, it allows consumers to spread the cost of bigger purchases across a longer period of time.

One attraction to this payment method is that consumers have additional purchase protection under Section 75 of the Consumer Credit Act 1974. This states that where purchases are over the value of £100, the credit card issuer and retailer are equally liable should anything go wrong with the product.

Credit cards are a flexible way to borrow, but unless used responsibly, they can also lead to unmanageable debt as they have a fairly high interest rate. Sometimes a personal loan is more suitable for long-term borrowing.

Credit Card Pros

  • Interest free short-term borrowing (as long as you repaid in full, on time)
  • Additional protection under Section 75
  • Some credit cards offer rewards or cash back for spending
  • Market-leading cards offer 0% balance transfers
  • A convenient way to spend in the UK and abroad
  • Easy method of payment over the internet or telephone

Credit Card Cons

  • An expensive way to borrow for the long-term
  • Late payments will incur additional penalty charges
  • Only paying minimum repayments could lead to years of debt
  • Easy to spend more than people can afford

Debit cards

A debit card is attached to a bank account, so when purchases are made using the card, the amount is immediately debited from the account. Debit cards have become the most popular way to pay in the UK.

Most high street bank current accounts provide the account holder with a debit card, but basic accounts may only issue a cash card for use in ATMs. Customers who are issued with a debit card can also use it to withdraw money from an ATM or get cash-back when making a purchase.

Debit cards started to become more popular in the UK when Chip and PIN was introduced, as it became a quick and convenient way to pay.

Debit Card Pros

  • Provides access to bank account funds anywhere in the world
  • Ability to get cash-back from certain retailers
  • Fraud protection
  • No transaction or interest fees to consider
  • Easy method of payment over the internet or telephone
  • Not linked to a credit source

Debit Card Cons

  • The only funds available are those in the bank account, so no credit to fall back on
  • Do not offer the same level of purchase protection as credit cards
  • Possibility of inadvertently entering unauthorised overdraft


Prepaid cards

This final payment card has become more popular in the UK over the past couple of years, as people turn to prepaid cards as an alternative way to pay by plastic.

Credit cards and debit cards are not available to everyone. Some consumers will find that they are unable to get one of these types of cards if they do not have a bank account or good credit score.

However, prepaid cards are available to everyone. They work in a similar way to a pay-as-you-go mobile phone: cash is loaded onto the card and can then be used to make purchases or withdrawals.

Prepaid cards do have a number of fees and charges associated with them, but the exact amount will vary depending on the type of card and the card issuer, so if you are thinking of getting one it is wise to compare prepaid cards. The most common fees are for reloading, making cash withdrawals, overseas purchases and replacing a card.

It's usually possible to reload or top up prepaid cards online, over the telephone, at cash machines or in certain stores. Some cards even act as bank accounts, with wages being paid directly onto the card.

Prepaid Card Pros

  • Reduces the risk of exclusion for people without access to a bank account or credit source
  • Available in different currencies, so convenient for overseas spending
  • Can help consumers manage their budget more effectively
  • No risk of running up debts
  • Available to everyone – no credit checks

Prepaid Card Cons

  • High charges and fees compared to a debit card
  • No interest earned on money loaded on card
  • Less purchase protection than debit and credit cards
  • Restrictions on minimum and maximum balance
  • No fraud protection as standard


Other Cards

While credit, debit and prepaid are the main type of payment cards in the UK, there are others, such as: