How do credit cards work?

Although there are over 500 branded credit cards in the UK, they are all operated by three international networks: Mastercard, Visa and American Express.

Before deciding whether to grant you a credit card, providers will assess your credit rating using files kept on you by credit reference agencies such as Equifax and Experian. Points in your favour will include good debt management, such as repaying a mortgage on time, and a long relationship with the same bank.

Points against your application include having no credit history, moving your home address frequently over a short space of time and country court judgments.

Cards start charging interest on purchases at different times. Some charge from the date the purchase is made, others on the date it is debited from your card account, and a few from the date on the statement. The third method will incur the least amount of interest.

If you repay your account in full, most cards will offer an interest-free period the next month. This can be up to 59 days. On joint credit-card accounts, the first-named card holder is liable for debts run up by any additional card holder. However, the second-named person is not legally liable for the first person's debts.

Watch out if a card has an exceptionally low rate of interest. Some of the cheapest cards have a late payment penalty of as much £20 if your monthly payment is even a day late or if you exceed your credit limit. Check whether a card's special introductory rate applies to new purchases or only debt transferred from rival cards - and whether the normal standard rate is competitive.

Under the 1975 Consumer Credit Act, the bank issuing your credit card is held jointly liable with the supplier if goods bought on your card are shoddy, lost or not what you ordered - this applies to purchases between £100 and £30,000.

Goods bought on debit cards, which deduct the money directly from your bank account, or charge cards, which must be paid off in full each month, are not covered under the Consumer Credit Act.

Many credit cards claim to offer security against internet fraud - but few point out that you are already only liable for up to £50 if your card is used fraudulently, unless you have been grossly negligent.

Some service providers, notably theatres, taxi firms and ticket-booking agencies, levy a surcharge or handling fee for paying by credit card. This can be any level they wish - but you must be informed of it before you sign for payment.

Gold credit cards target high-spend customers. To qualify, a credit card must offer a minimum credit limit of US$ 5,000 (£3,000) and provide an emergency medical hotline. There are no specific requirements for platinum cards. Some credit cards - known as affinity cards - make a donation to a particular charity or organisation every time you spend - typically 0.25 per cent of each purchase.

Credit cards come with a variety of insurances. For £8 to £10 a year, card protection will cancel all your credit cards if they are lost or stolen, and wire cash in an emergency. Payment protection involves a small monthly premium and will meet your minimum monthly payment for 12 months if you cannot work through sickness or accident.

Withdrawing money from cash machines using your credit cards is expensive. Most cards charge a handling fee of 1.5 per cent on each withdrawal and may not give you an credit-free period before interest starts to be charged.

Using your card abroad can be cheaper than buying foreign currency or traveller's cheques. Although there may be a foreign usage charge on each purchase, currency exchange will be at a wholesale rather than a retail rate.