Credit Cards

Credit cards are an everyday part of life today and a useful tool for managing your finances when handled responsibly. With an abundance of available credit cards it makes sense to shop around.

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Since the introduction of credit cards in the 1960s they have become a common way of purchasing items. They should not be confused with debit cards which are charged directly to a bank account and do not usually involve any form of credit.

What is a credit card?

A credit card is simply a way of buying goods or services immediately and paying later. It is effectively continual unsecured loan facility that can be used as and when the card holder wishes.

How does a credit card work?

When a person obtains a credit card there is usually a limit on the amount the can spend on the card. If a credit card is used to buy goods or services, the card provider will pay the person who accepts the card for the items you bought. Each month a statement of transactions in the previous is sent to the card holder. The card provider will specify the minimum amount that has to be paid (usually £10 or 2.5% of the total outstanding, whichever is higher). The card holder then arranges to make a payment to reduce the balance.

What interest is charged?

Each credit card will have its own interest rate. The rate can vary between the credit cards offered by the same bank. The rate quoted will depend on a number of factors, including the risk that the balance will not be repaid. The rates can vary between banks, and even the cards offered by the same bank. Typically the interest rate is between 10 and 25% per annum.

How is interest calculated?

Interest is usually calculated daily and added to the monthly statement as a single amount. Most cards will not charge interest if the amount due is paid off in full before the date specified (except cash advances).

Can I withdraw cash?

Most cards will allow you to draw cash out from a cash machine however you will be charged interest on the withdrawal and there will usually be a transaction fee added.

Do I have to pay interest?

A simple answer is no. This assumes that you pay in full each month to clear all the purchases shown on the card statement. There is not usually any interest free period on any cash withdrawals.

Why not pay cash?

If you are buying goods or services valued between £100 and £30,000 and pay part of the amount due on a credit card, the card provider is liable if the goods are faulty or the person supplying the goods or services goes bust. This is especially important when buying goods abroad and they are faulty or
do not arrive.

What is cash back or points collecting?

Some credit cards will offer a cash back or points collecting facility.

A Cash back credit card will give you a fixed percentage of the amount spent on the card back on a regular basis as a credit on your card statement. A points collection n scheme will give you points based on the amount spent that can be used to obtain items from a catalogue or convert them into vouchers such as Avios (formerly Air Miles).

How does 0% balance transfers work?

Some credit card providers will offer new card holder the opportunity to transfer balances to a new card and not be charged interest on the balance transferred for a fixed period of time. There are often stringent conditions applied to qualify for the interest free period.

Credit Card Tips:

If you pay your credit card balance in full every month you can practically ignore the interest rate because most cards offer an interest free period of around 56 days so if you pay your balance within this time no interest is charged.

If you only pay part of your credit card balance each month then choosing a credit card with a low interest rate is a sensible option. Some credit cards have a low fixed balance transfer rate and a low typical APR. Transferring a long standing balance to a card such as this could significantly reduce the amount of interest and the overall monthly repayments.

If you only pay the minimum amount of your outstanding credit card balance then switching to a credit card with 0% on balance transfers for a long time could also save you money. Many credit cards now offer balance transfer offers up to 12 months but be aware that many also charge a balance transfer fee.

Some new credit cards encourage people to repay more of their balance off each month by reducing the interest rate as the outstanding balance is reduced. This can help people pay off the balance in a much shorter time and significantly reduce the overall credit card debt.

Most credit card issuers make it easy to switch credit cards and not only are there often balance transfer deals but you may also be offered additional perks for the first few months or even for the entire time you keep the account active.

Before taking advantage of a credit card balance transfer offer always consider the normal terms of of the new credit card after the initial balance transfer offer runs out.

Always make sure your application for a new card is accepted before cutting up your old one.

Credit Card Perks and Incentives:

Perks are an increasingly common feature of the credit card market. Some perks can be of particular benefit to some people while of little use to others so it makes sense to shop around if you are after something in particular. Credit card perks can be a decisive factor for some people when it comes to
choosing a credit card and there is a wide range of choice available.

Points Schemes

With some credit cards you can earn points according to how much you spend which can be exchanged for goods or discounts on goods. This is potentially useful if you want the goods on offer and spend enough to accumulate the necessary points.

Airmiles

These are a type of points scheme and points can be exchanged for flights and hotel discounts. This may be a valuable benefit for people who spend large amounts on their credit card and particularly those who fly frequently.

Some credit cards offer discounts on holidays or car hire.

Most card issuers also offer an emergency replacement which could be sent to you if your card is lost or stolen, even while abroad.

Remember, when using credit cards for any reason, be sensible with your money. If you only pay the minimum each month it could take years to clear the debt.