Credit knowledge

Find out all you need to know about how credit works and how best to use your credit card. From credit history to how to avoid paying interest, you'll find some really helpful tips.

What is an interest rate?

When you borrow money whether it's on a credit card or a loan you will probably need to pay interest on that amount. A credit provider will determine your interest rate based on your credit score and that interest rate will be applied to the amount you've borrowed. Interest is calculated as a percentage on the amount you borrow so the longer it takes for you to pay off the amount, the more interest you will end up paying.

The interest rate for credit cards can differ depending on how you use your card, so you may have different rates of interest for purchases, balance transfers and cash withdrawals.

Most credit card providers will wait up to 56 days before charging you interest on purchases, paying off your balance in full each month for at least two consecutive months could help you avoid paying any purchase interest.

What is a purchase rate?

This is the rate applied to all purchases you make on your card such as, petrol, new shoes and holidays.

What is a balance transfer rate?

The balance transfer rate is applicable to any debts you may have transferred to your credit card from other credit or store cards.

What is a cash withdrawal rate?

When you use your credit card to withdraw cash at an ATM you will incur a cash withdrawal fee. This will be added to the amount you withdraw and it will be subject to your agreed rate of interest. Interest on cash withdrawals and cash transactions is calculated daily, so it's a good idea to only withdraw cash in emergencies. Some transactions you make on your credit card are also considered as cash withdrawals, where a fee will be charged, and these include transactions such as for gambling websites or when buying foreign currency at a currency exchange.

What is a credit card APR?

Credit providers will advertise their products using their APR (Annual Percentage Rate of charge).

The APR makes it easy to compare different credit products before deciding which one is best for you. For credit cards the APR is based on the purchase interest rate and includes things like annual fees, although cash withdrawal charges and default fees are not included.

It won't tell you exactly how much you'll end up paying back but it will help you compare credit card deals to find out which one is best for you, and which ones you can afford.

Whenever you apply for credit one thing is for sure, the credit companies will want to know who they are lending their money to.

They will use 3 different ways of assessing you which are, credit scoring, credit rating and credit history. Many people think that these are all the same thing but they are in fact subtly different.

What is a credit score?

Your credit score will be created by the credit providers from the information you have given in your application, what's in your credit report, and your credit rating. The provider will use this credit score to decide whether you qualify for credit, what your credit limit could be and the interest rate.

Learn how to improve your credit score.

What is a credit rating and what is bad credit?

A credit rating is a record of how well you've managed your finances in the past. Things like missing a credit card payment or defaulting on a bill can damage your credit rating. This is known as having bad credit, which can make it harder to borrow money – whether that's a store credit card, a loan or a mortgage.

Credit companies want to know who they are lending their money to, so when it comes to applying for credit several things are taken into account.

First, they will assess your credit rating and your credit report, which is taken from the credit reference agencies. This assessment helps them create what's called a credit score.

When applying for credit, you want to have your credit history in the healthiest state possible. If you have bad credit, find out more about how to improve your credit rating with credit cards for bad credit such as the Capital One Classic Credit Card. Being turned down for a credit card may damage your credit rating. Safely check if you could be eligible for a Capital One credit card using our QuickCheck tool. This checks your eligibility across all of our cards without damaging your credit rating.

What is a credit history?

Your credit history is held by credit reference agencies and is one part of your credit report. Basically, credit history is exactly that, how you have managed your finances in the past, including credit cards, loans or a mobile phone contract.

What is a credit rating?

Your credit rating is a score based on your credit report created by the credit reference agencies. It takes all of your credit history and applies an overall score to it based on how you have managed your finances in the past, giving you a good general indication of how lenders are likely to view your application. It also looks at non-financial information such as court orders i.e. CCJ's, and whether you are on the Electoral Roll.

Find out how you can improve your credit rating.

Why is it important for me to have a good credit rating?

The financial information held about you at the credit reference agencies can help you do many things, such as taking out a loan, applying for a mortgage or even getting a mobile phone. Most companies that provide credit take your previous credit history into account. If you have a bad credit rating, this may impact future applications for a credit card.

What is a credit reference agency?

Credit reference agencies are companies that collect information about you, for example information from the electoral roll, what credit card and store cards you have, your mobile phone contract suppliers, mortgage information - essentially anything financial. They also monitor how well you have paid these providers.

The credit reference agencies then sell this information to credit providers as credit reports.

Credit reports

Credit reports help credit providers to rate your suitability for products and decide whether to accept your application.

You can see a copy of your credit report by contacting one of the 3 independent credit reference agencies:

Equifax  opens in a new tab or TransUnion  opens in a new tab or Experian  opens in a new tab

Your monthly credit card statement tells you a lot more than just how much you owe and when to pay it by.

You can receive your credit card statement in 2 ways; one is the traditional way where it's printed onto paper, popped in an envelope and posted to you. The other, much more convenient route is online. If you have a Capital One credit card you can register for Online Account Servicing and you won't need to wait for your latest statement to be delivered.

Whichever way you choose to receive your credit card statement it will have the same important information available.

Outstanding balance

The outstanding balance is the total amount you owe including all interest and charges up to the statement date.

Minimum repayment

It's important that you make this payment on time each month. If you don't, you will incur additional charges and damage your credit rating. If you choose to only ever make the minimum repayment it will take you longer to pay off your debt and will cost you more.

Payment date

This is the date by which your credit card provider must have received your payment, so you need to consider how long it will take for the payment to reach them. You need to pay at least the minimum amount requested or you will incur additional charges and damage your credit rating.

Interest rates, fees and charges

This shows you the interest rates for different types of borrowing. For example, the interest rates for purchases, balance transfers and cash withdrawals may all be different. The fees and charges will show on your statement like normal transactions. Find out more information about interest rates.

Allocation of payments

This will explain the order in which purchases, balance transfers, cash withdrawals and any fees will be paid off when you make a payment.

Your credit card comes with some inbuilt protection. Some is automatic and some is optional, and may require you to pay for the additional benefits.

When you make a purchase that costs between £100 and £30,000 with your credit card the law gives you certain rights. For example, if you don't receive your order, something you buy is not as it should have been, or the supplier is unable to fulfil your order because it has gone out of business, you may be able to make a claim against the supplier, your credit card provider, or both.