“With almost two-fifths of credit card holders owning more than one card, and many admitting they don’t truly understand the terms and conditions, it’s easy to see how debt could spiral out of control,” says Kevin Mountford, banking expert at MoneySuperMarket.
Here’s a guide to the 10 things you need to know about your flexible friend.
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 spotted 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 3%.
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 27-month interest free deal may sound great, but the 3% 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.
In fact, there are several interest-free balance transfer cards that also don’t charge a transfer fee. Choose one and clear your debt before the end of the 0% period and you’ll have cleared your debt without paying a penny more in interest.
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.
But, if you have an overdraft racking up huge interest charges, getting a 0% money transfer credit card and paying the transfer fee to move your overdraft onto the card could save you money, as long as you clear the debt before the 0% period ends.
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.
The Financial Conduct Authority is currently considering bringing in new rules that would effect anyone who is repeatedly late with payment. ‘Persistent debtors’ could have their credit stopped and be moved onto a repayment scheme to help them clear their debts.
Avoid late payment fees by setting up a direct debit to pay either your balance in full, the minimum payment or a set amount off your credit card each month.
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.
For example, if you had a credit card debt of £3,000 with an APR of 18.9% and only repaid the minimum payment of 2.5% each month, it would take you 26 years and seven months to clear the debt and cost you £3,988 in interest.
However, if you paid off £75 a month (2.5% of the initial £3000), it would take you five years and one month to clear the debt and save you £2,463 in interest. That is a whopping 21 years quicker!
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, and often at a higher rate. 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
Try to avoid ever withdrawing cash with your credit card. If you do stick your card in an ATM be aware that you’ll be charged interest on what you withdraw from the minute the money leaves the cash machine. You may also find you are charged interest at a far higher rate than the headline interest rate your credit card charges on purchases.
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.
This means that if things go wrong you can claim a refund from your card provider. But, you are only covered for credit card purchases worth between £100 and £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.
One way to avoid this is to use a comparison website that offers a ‘soft search’ facility. This means you type in a few details and the comparison site will check to see which lenders are likely to accept your credit card application, without leaving any footprints on your credit rating. So, you can apply for a credit card with a fair idea that you are going to be accepted.
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 credit 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.