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How do credit cards work?

A credit card can be super useful, but if you don't use it wisely it can be quite expensive. Make sure you understand the basics.

What is a credit card?

Essentially a credit card is a tool that lets you buy something now and pay for it later. The company that issues the card pays for your purchases up front, trusting that you will pay them back later.

How do credit card interest rates and fees work?

Remember that when you use a credit card to pay for something you are actually borrowing money. You won't have to pay any interest if you pay everything back by the day your statement is due. If you're not able to do that, you can make monthly payments until the balance is paid, but you'll have to pay interest on the amount you owe.

It's important to know that credit card debt has a high interest rate, and it is calculated daily. So if you're only paying the minimum amount each month (usually 3% of your balance), it will take you a long time to pay it off. In the end, you might end up paying a lot more than your original purchase cost.

In addition, some credit cards will charge you an annual fee. Some cards will waive this fee if you spend a certain amount in a specified time period, but each card company has its own rules for this.

You can find out more about our credit card fees and charges in our Personal Financial Charges guide for HSBC credit cards.

If you are having trouble paying down a large credit card debt, consider signing up for a balance transfer to save money on interest fees.

What is an interest-free period?

Many cards offer an interest-free period on purchases. For HSBC credit cards, that can be as long as 55 days. If you want to maximise the interest-free period, you need to make your purchases right at the beginning of your billing cycle.

So for example, if your credit card statement is issued on the first of every month, that's when you should make your purchase. If you buy something on, say, 1 October, it wouldn't show up on your statement until 1 November, and you'd only have to pay for it on 24 November. And as long as you pay the entire balance of the statement you receive on 1 November by 24 November, you won't have to pay any interest at all.

So from 1 October to 24 November is 55 days where you wouldn't need to pay any interest.

Other costs

In addition to interest, things can also start to add up if you accidentally miss a credit card payment, as this can lead to late payment fees, as well as damage your credit rating. You can avoid this by setting up autopay to make sure your payments are always made on time. (If you do set up autopay, you should still be sure to review your credit card statement so you can spot any suspicious transactions.)

Additionally, many credit cards will charge you an annual fee depending on the extra benefits the card gives. Sometimes that fee will be waived if you meet certain spending requirements, but you'll need to check the terms and conditions of each card to know for sure.

Set the right credit card limit

You should be comfortable with the amount you spend on your credit card, so set a credit limit that is the right level for you. If you need a little extra flexibility and you know you can afford it, you can always ask your lender to increase your limit, subject to credit assessment. On the other hand, if you're worried about being tempted to overspend, you can ask for it to be reduced, subject to minimum product limit.

What's the right card for you?

Rewards programs and other perks are great benefits, but when you're deciding on a card it's really important to look at the Key Facts Sheet which contains important information on interest rates, fees and charges and key product features.

Before you even start shopping around, make sure you have a good understanding of what you'll use the card for. Do you want to make a big purchase? Are you looking to get cashback when you pay your bills? Looking to rack up miles for free flights? Or do you want to consolidate your credit card balances? Take a look at our credit cards and see which one is right for you.

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