Credit Cards – Moneyfacts.co.uk Guide
Credit cards certainly have a bit of a bad press, blamed for reckless spending and increasing debt to record levels, but if they are used correctly they can be an essential piece of plastic to own. Unlike debit cards, where the money is taken straight out of your bank account, credit cards allow you to run up a bill for all of your spending. They also offer you more protection from fraud and faulty goods, and many come with added incentives such as reward schemes and loyalty points.
However, there is no one-size fits all credit card - so the perfect credit card for you will all depend on how you plan to use it
The ins and outs of credit cards to help you know where to start
There are thousands of credit cards to choose from, all with varying terms and conditions, but in a nutshell, all credit cards work in the following way:
Once you apply for a credit card, a specified credit limit for each cardholder will be agreed at the outset and this will depend on your individual circumstances, it can also be reviewed regularly.
Most credit card providers will insist that you pay a minimum amount each month, or a percentage of any outstanding balance each month. The minimum amount that the lender requires to be repaid can vary between 2% and 5% each month.
credit cards will offer you between 45 and 59 days of interest-free borrowing.
If you are able to pay your bill off in full each and every month you won’t be charged any interest, but if you only pay off the minimum or a proportion of the total bill you will be liable to a charge.
There is usually a penalty for late or returned payments or for exceeding your credit limit.
There many different types of credit cards:
0% on purchases cards (Great for big purchases!)
Credit cards come in handy when you have large purchases to make, or if you have an expensive month coming up. Getting a credit card offering 0% on purchases will allow you to spread the cost of your purchase without worrying that your debt will grow.
- Some of the best 0% on purchases cards will offer you up to 12 months of interest free borrowing.
- All of your spends will be totaled up over the month. Once your bill is issued you will usually have up to 28 days to pay off your balance in full, or pay a proportion of your debt, such as the minimum repayment.
- If you are able to pay back your balance in full each month, it’s possible to get some real benefits. You could earn cashback – a cash reward calculated as a percentage of your spending, or loyalty points, which can be, redeemed for high street or restaurant vouchers. Some cards will also offer benefits such as free travel insurance, free flights, and discounts on holidays or purchase protection insurance.
- Depending on the card you choose, if you make big purchases, it’s worth waiting until your statement is produced to benefit from the maximum interest-free period.
What to watch out for
- Remember, regardless of the 0% on purchases credit card you choose, you need to remember that you will still have to repay your balance at some point.
- So, try and pay off as much of your balance as you can over the 0% period
- However, if you withdraw cash on your card you will be charged from the day you make the withdrawal.
0% Balance transfer cards (Great for paying off your debts!)
If you are paying interest on existing debts you should always consolidate them with a balance transfer credit card. Transferring a balance means that your new credit card provider will pay off your existing debts up to your credit limit, and you’ll benefit from no interest payments for a set amount of time.
- There is a wide range of balance transfer credit cards offering 0% for anything from six to 15 months. In general, the longer the 0% period the better.
- Until recently, most 0% balance transfer credit card providers were falling over themselves to attract new customers. Now that customers are taking full advantage of the 0% balance transfer deals and moving on swiftly to the next credit card, virtually all providers will charge up to 3% per transaction.
- Once you have transferred your balance, make sure you pay off as much as you can over the 0% period, because after the period ends the credit card will revert to its standard rate.
- If you aren’t able to pay off your full balance by the time the 0% period ends, you should consider transferring your balance again. However, the more you switch your balance the worse your credit score becomes.
What to watch out for
- If you know that you
won’t be able to pay off your total balance over the set period, then
a life of balance credit card is more for you. It could end up saving
you a small fortune in interest.
- Most balance transfer credit cards order their repayments and will always pay off your most expensive transactions last. So if you want to avoid being hit with a hefty charge you should never make any purchases on a 0% balance transfer credit card.
All credit cards have some hidden nasties…
- Withdrawing cash – Don’t do it! If you use your credit card to withdraw cash, you will be charged interest at extortionate rates. Your provider will hit you with a cash withdrawal fee, which ranges between 1.5% and 3% and is charged from the day you make it.
- Using your credit card abroad. If you use your credit card abroad, your provider will add on a foreign usage charge, which can be up to 3%. If you take out cash abroad on top, you’ll also be hit with a withdrawal fee. So, if you plan to use your credit card abroad, take out a credit card that doesn’t include foreign usage charges.
- Penalty Fees. If you pay late, go over your limit or one of your direct debits or cheques is unpaid, then most providers will charge you. The OFT has capped this limit at £12.
- Minimum Repayments - If you are only able to make the minimum repayment of your outstanding balance each month, you will barely cover your interest charges and it will take you years to pay off your balance.
£5,000 on a 15.9% credit card, paying the minimum repayment of £5 per month
= an extra £7,450 in interest, and will take 38 years to pay off!!
- Payment Protection Insurance - Many credit cards will offer Payment Protection Insurance (PPI) which will pay a percentage of your bill in the event of you being unable to work as a result of accident, sickness or redundancy (or any combination). However, PPI can be costly, so think carefully before you take it. Quantify how much it would cost you, and how much money you could be wasting. If you do take PPI, make sure that it suits your circumstances. You are not obliged to take it, and you can even take it out separately if you find you need to.
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