10 things you need to know about credit cards
1 UNDERSTANDING APR
APR stands for annual percentage rate. This tells you how much interest you will be charged on your credit card debts each year. Many credit card companies like to show a monthly interest rate, but for comparison and simplicity they have to show the annual rate. This involves a compounding effect (showing the interest paid on the interest from previous months).
So, for example, a credit card charging 2% interest a month would have an APR of 26.82%. This means if you had a balance of £1,000 on a card you would have to pay £20 interest a month.
One final thing to be aware of with APR is that you won’t necessarily get the rate you see advertised when you apply for a credit card. Credit card providers only have to give the advertised APR to 51% of applicants, so if you have a speckled credit history you may be offered a higher APR.
2 BALANCE TRANSFER FEE
This is the amount you will be charged to move a balance from one credit card onto another. The amount usually takes the form of a percentage of the amount being transferred – typically around 2.8%.
At present, there is a lot of competition in the market with firms bringing out longer and longer 0% interest periods, but make sure to weigh up the balance transfer fee against this 0% period. A 22-month interest free deal, as offered by Halifax, may sound great, but the 3.5% balance transfer fee is very high.
The best bet is to work out – realistically – how long it will take you to clear your debt and choose a card accordingly, as the cards with shorter 0% periods tend to have lower balance transfer fees.
3 MONEY TRANSFER FEES
These are very similar to balance transfer fees but instead of being a charge on money moved from one credit card to another, they are a charge on moving money from your credit card into a bank account. These charges tend to be higher than balance transfer fees – around 4% in most cases.
4 LATE PAYMENT FEES
If you don’t make the minimum payment on your credit card by the time stipulated on your bill you will be subject to a late payment fee. These have been largely standardised across the industry at a £12 one-off fee.
That may not sound much, but remember that frequent late payments can affect your credit rating and could make your credit card provider reassess your creditworthiness, leading it to reduce your credit card limit and even increase the interest rate on your card.
5 MINIMUM REPAYMENTS
The minimum repayment is the very least you must repay on your debt each month. Fail to pay it and you’ll accrue late payment charges and run the risk of damaging your credit rating.
The amount is usually the greater of either a percentage of your debt or a fixed sum so, for example, it could be 3% or £5. It is always better to pay a set amount each month rather than a percentage, as with the latter, the amount will decrease as your debt decreases. So if you had a credit card debt of £500 with an APR of 17% and only repaid the minimum payment of 3% each month, it would take you nine years to clear the debt and cost you £309 in interest.
However, if you paid off £15 a month (3% of the initial £500), it would take you three years and nine months to clear the debt and save you £146 in interest.
6 FOREIGN USAGE COSTS
Most people head abroad and spend money in exactly the same way as they do at home - on plastic. But while this may be the easiest option, it can work out costly thanks to foreign usage charges.
Most providers will charge you a set fee of as much as 3% every time you use your card abroad. If you want to use your credit card on holiday, find one that doesn’t charge a foreign usage cost.
7 WHEN YOU START ACCRUING INTEREST
Many of us use our credit cards as a free borrowing facility by paying off the balance in full each month before interest starts being accrued. For this to work faultlessly you need to be aware of how long you’ve got between buying something and interest starting to accrue on that debt.
The interest-free period varies between providers, but can be anything up to 56 days – unless you withdraw cash with your card, when interest is charged immediately. Also, if you don’t clear your balance in full one month, check when the interest is calculated from.
Some providers will backdate it to the date of sale, whereas others will simply start charging interest from the 57th day.
8 WITHDRAWING CASH
Yes, you can stick your credit card in an ATM and withdraw a load of cash - but you really shouldn’t. Any cash you withdraw is usually liable to a much higher interest rate than the headline purchase rate.
For example, with the Barclaycard Simplicity card your purchase rate is 7.9% APR but withdraw cash with the card and you’ll pay 15.8% APR on that money. If that isn’t bad enough, you also don’t get the interest-free period on cash withdrawals that you get on purchases.
That 15.8% rate is charged from the moment the money leaves the cashpoint. And to top it off, most cards charge a cash withdrawal fee of around 2.5% of the amount you take out.
9 CONSUMER PROTECTION
One of the big benefits of your credit card is the additional consumer protection you receive. Under Section 75 of the Consumer Credit Act 1974, the credit card company is “jointly and severally liable” for any breach of contract or misrepresentation by the retailer.
So if things go wrong you can claim a refund from your card provider for anything over £100 but less than £30,000. It is also applicable if only part of the payment was on your card (as long as the full cost is no more than £30,000).
For example, if you bought a £5,000 car from a dealer and put the £500 deposit on your credit card while paying the rest by cheque, and the dealer went bust before you took delivery of the car, you could claim the full £5,000 back.
10 CREDIT CARDS AND CREDIT REPORTS
When you apply for a credit card, the company will check your credit record to see if you are a good borrower who pays everything back on time. Every time a card firm checks your file it is flagged, so if you apply for lots of credit cards all the firms will see each other’s credit checks.
And naturally, a lot of credit checks causes alarm with lenders, which can make them more likely to reject your application. So don’t make lots of applications at the same time.
Mini guide to credit cards
- 0% purchase cards – a deal on cards whereby you pay no interest on purchases for a set period.
Great for: Big purchases.
- 0% balance transfer cards – a deal where you pay no interest on balances transferred from other cards for a set period.
Great for: Clearing debts.
- Cashback cards – these pay you back a small percentage of what you spend on the card.
Great for: Those who pay their balance in full each month.
- Rewards cards – cards that reward you for using them with points to use towards a variety of things from supermarket shopping to flights.
Great for: Anyone who is brand loyal to one supermarket or airline.
- Low-rate cards – these offer you a lower standard APR, usually under 10% APR.
Great for: Anyone with a large debt who doesn’t want to switch.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.