How to choose a credit card
For many of us, in order to cope with day to day expenses, borrowing remains a fact of life. But before turning to credit it's essential to understand what you're getting into.
A credit agreement, such as a credit card, overdraft, personal loan or mortgage, is a financial arrangement that allows you to borrow money on the understanding that you will pay this back at a later date.
You can request a statement at any time to show how much you owe, although card providers should send you regular statements in any case.
If you fall behind with payments or have broken the terms of the agreement then the provider must send you either a default or arrears notice, which includes an Office of Fair Trading information sheet.
However, if you feel the provider hasn't sent you full or correct information, the credit agreement can’t be enforced, in these scenarios contact Consumer Direct for more help.
Choosing a credit card
The best thing to do when you are looking for a new credit card is to go in armed with all the information you’ll need. Whether it’s a balance transfer card you’re after, or a card for use in the odd emergency, being clued up will ensure you not only spot the best deals, but also know how to check they’re everything they’re cracked up to be.
Ask yourself the following questions when considering credit:
* Have you shopped around and compared the cost of credit from other providers?
From moneyfacts.co.uk, defaqto.com to moneysupermarket.com and Moneywise's own comparison tools, there are a host of websites allowing consumers to find the best deal to suit them.
* Is the credit agreement secured?
When a loan is secured it means the risk of lending is secured against something, often your house. The advantage of this is that you can borrow more but is this worth it if you stand to lose your home?
Unsecured loans don't tend to lend as much but at least your most valuable assets are protected.
* Can you afford the monthly repayments even if the base rate goes up?
At the moment the base rate is a lowly 0.5%. There are no signs that it will imminently go up, although experts expect it to increase by the end of the year. So rates may be low now, but what would happen if an extra 1% was added on to your monthly repayments?
* What are the charges if you miss or are late with a monthly repayment?
Don't be swayed by headline rates alone, read the small print to see what charges or penalties you could face.
* Do you understand the costs involved with terminating the agreement early, and are there any penalties?
Exit fees are there to deter borrowers from jumping ship. Check these before choosing a credit agreement to make sure you can pay them in the given circumstances.
* What are the effects on my credit rating?
Each time you make an application for credit, it leaves a footprint on your credit rating, which will ultimately make it harder to borrow if you've made multiple applications.
* Does it make financial sense in the long run?
You may have no other option but if you're loan payback period is stretched over a considerable number of years, calculate how much more you'll end up paying once interest is added to the final total.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
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.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.