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How credit cards work

Using a credit card can be a great way to get rewards on your spending while building up your credit score.

They also give you more flexibility with your money - you can buy things today, and pay for them later.

But with so many different credit card features and rewards, it can be tricky to work out which card is right for you.

In this guide, we explain what credit cards are used for, how they work and what you need to apply for one. We also break down some key terminology and features you'll see when comparing credit cards.

What is credit?

Credit is essentially borrowed money.

While a debit card gives you access to your own money in your bank account, a credit card gives you access to money borrowed from your bank.

Because it's borrowed money, you pay interest on your credit card balance if you don't repay it in full each month.

What are credit cards used for?

Making big purchases

One of the main benefits of using a credit card is being able to spread the cost of large purchases.

Whether it's paying your rent for the year, booking a holiday, or splashing out on a luxury watch, using a credit card allows you to cover the cost upfront, and pay it back in smaller chunks each month, plus interest.

Some credit cards have an interest-free purchase period, ranging from 3 to 24 months or more. During that time, you won't be charged interest on your purchases, as long as you make at least the minimum repayments due each month.

Remember, once this interest-free purchase period ends, or if you don't have one, you'll be charged interest on your balance at the Fixed Annual percentage rate for your card.

With an HSBC credit card, you can also apply for credit to be transferred directly into your bank account through a Cash Instalment Plan if you're eligible.

Explore: Cash Instalment Plan

Building your credit score

Using a credit card can also be a great way to build up your credit score, so long as you keep up with your repayments each month and stay within your credit limit (the maximum you can spend).

Banks and other lenders look at your credit score when you apply for a loan or a mortgage.

A high credit score demonstrates your ability to keep up with regular payments and manage debt – so, the higher your score, the more likely you are to be accepted for a mortgage or loan.

Your credit score – which will be between 300 and 900 – is calculated by the Al Etihad Credit Bureau (AECB). You can check your current score on the AECB website.

Get purchase protection

Some credit cards offer purchase protection against the theft and accidental damage of purchases you make with your card.

You can also get warranty extensions for things you buy with your card to help you with the cost of repairing or replacing them.

And you can even get travel insurance included with some credit cards. This may cover you for travel disruptions and medical expenses when you're abroad.

Having emergency funds

It's a good idea to have some kind of emergency funds tucked away to prepare for unexpected financial costs.

While it's best to build an emergency fund with savings, a credit card can be used as a short term solution for covering unexpected costs upfront, giving you the flexibility to pay back the money gradually.

Credit card key terms - what you need to know

Credit limits

Your credit limit is simply the maximum amount you can borrow through your credit card.

If you carry your balance from one month to the next, then the closer you are to your credit limit, the more interest you'll pay, as it's calculated as a percentage of your balance.

However, there will always be a set limit to how much you can spend on your credit card.

Interest rates

You'll pay a Fixed Annual percentage rate on purchases and cash withdrawals if you don't repay the balance of your credit card in full each month.

Some credit cards have a lower interest rate than others, so if you don't think you'll be able to repay your full balance every month you may want to choose a card with a lower rate.

However, remember to check if there's an annual fee for your card as well, as this could outweigh any savings you'll make on a lower interest rate if you don't pay interest very often.

Also, some credit cards have a higher interest rate, but more attractive rewards. Weigh up which option is best for you based on how you'll use your card.

Explore: Compare our credit cards

Annual fees

A credit card's annual fee is a fixed charge for owning your card, regardless of how much you use it.

Some credit cards have no annual fee, or give you your first and second year free - but they could have higher interest rates to compensate.

0% balance transfers

A balance transfer is when you transfer the outstanding balance of your existing credit card(s) to a new card.

This is a handy way of consolidating your debts, and some banks offer 0% interest on balance transfers for a fixed period of time when you transfer your account to them. During this initial period, you won't pay interest on the balance you've transferred.

Explore: What is a balance transfer?

Interest-free periods

Interest-free purchase periods work in a similar way to 0% balance transfers.

Some credit cards reward you with an initial timeframe in which you won't be charged interest on purchases and/or cash withdrawals made with your card.

We also provide Flexi Instalment Plans with our HSBC credit cards with lower interest rates, or even 0%, for some purchases.

Explore: What is a Flexi Instalment Plan?

Using your credit card overseas

Whether you're on an international business trip or a family holiday abroad, using a credit card for your overseas spending can have its advantages.

You may find your spending increases when you're overseas - you're more likely to eat out, stay in hotels, and spend on entertainment.

Using a credit card can help to manage your increased spending and spread your travel costs over the months to follow.

You’ll usually be charged a foreign currency processing fee for using a credit card outside of the UAE, in the same way you would with a debit card. With an HSBC credit card, it’s 2% of each transaction.

Explore more

Learn how credit card charges work and how you can avoid them. 

Learn more about the different types of credit card to help find the one that’s right for you.
Learn about how to use a balance transfer credit card and what a 0% interest rate means.