Credit Cards Guide
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1. What's the difference between a debit card, a charge card and a credit card?
Superficially you would be forgiven for being confused by the three types of plastic you are likely to find in your wallet or purse. However, only one offers credit in more than the short term. A debit card will be linked to your bank account, usually your current account. The cost of anything purchased with this card or any money withdrawn from the bank will be taken from your account more or less immediately. You might find it easier to think of a debit card as a plastic cheque! If you use a charge card, you may make purchases and in some cases withdraw cash using the card, "charging" these costs to the card account. You will be required to settle in full each time you are sent a statement of the account, usually monthly. Credit cards, on the other hand, are a form of borrowing. The card issuer will set you a maximum credit limit and you may spend as much as you like up to that limit, provided that you pay a minimum amount off each month. Click here to compare credit cards online to find one that best suits your needs.
2. What about store cards and so-called affinity cards?
The only reason to have a store card, which is just a credit card issued by one particular retailer, is if the store does not accept other credit cards. In general terms be wary of store cards, they can and do charge up to a third as much again in interest as ordinary credit cards. Affinity cards operate like ordinary credit cards. They’re not tied to a particular store but rather to a particular, usually charitable, cause. This means that a donation will be made to the charity when you are issued with the card and for every transaction you make on the card a small percentage donation will also go to the charity.
3. How much should I pay off each month?
Most credit card issuers will stipulate a minimum payment of £5 or 5% of the outstanding balance on your credit card account. Beware that some card issuers stipulate a lower minimum payment of just 3%. This is not a way for you to save money. Obviously, the less you pay off, the more interest you are charged.
4. Are credit cards an easy way to borrow?
The answer to this question is yes but for some people they can be a far too easy way to borrow and a very expensive one. Annual interest rates can be more than three times the current bank base rate are by no means unusual among the big names among credit card issuers.
5. How is interest calculated on my credit card account?
This can be very confusing, especially when you are comparing offers from credit card issuers. You may see as many as three or four different interest rates quoted for each card. First of all, you will be charged interest each month on the outstanding balance on your credit card account. Typically, this monthly interest charge will be between 1 and 2 per cent, giving us an annual interest rate spread of 12 to 24 per cent. However, many card issuers now quote low introductory rates as a come-on to get the customers in, anything between 5 and 10 per cent for periods of between 6 and 12 months. If you see tempting offers like this, think cooly for a few moments.
Will the introductory rate cover the transfer of outstanding balances from other credit cards until you have paid them off? What does the interest rate revert to once the introductory period is over?
Yet other cards may offer lower interest rates for higher turnover. That is to say, the more you spend on the card, whether you pay it off or not, the lower the rate of interest you will pay. If all these various rates of interest were not confusing enough, you may well find that the APR quotation, the legally required annual percentage rate description, may be different again. Why? Because it will also include the cost of any annual fee that the card issuer may charge. Depending on the card issuer, these fees can range from nothing to more than £100 a year.
6. What's the significance of a "gold card"?
The card issuers will tell you that a gold credit card is a status symbol which says something about you. In reality, all it says is that you are probably earning more than the national average, maybe at least £25,000 a year, and that the issuer has decided you are a better than average credit risk. A gold credit card will have a higher credit limit than an ordinary credit card and will allow you to draw more cash out on a daily basis. However, there may be well be some advantages to having a gold card in the shape of the various insurances which usually come free with the card. Of course, these policies are not really "free", you will be paying for them through a larger annual fee. Click here to compare credit cards online to find one that best suits your needs.
7. All my credit cards seem to have the same symbols on. Why is this?
There are literally hundreds of different credit cards on the market with a variety of terms and conditions. However, a large percentage of them actually operate through just two international credit card businesses, VISA and Mastercard, and it is these logos which you will see on your cards and in shop windows.
8. What are the advantages of buying goods with a credit card or can I just get cash out?
Cash withdrawals on credit cards are usually more expensive than store purchases. Many card issuers will charge immediate interest on cash advances even if they do not do so on purchases. In addition, you may find a transaction fee of up to £5 has been deducted from your credit card account for a cash withdrawal. The most useful reason for using a credit card for purchases is the extra protection you get. Legally, the credit card issuer is jointly liable, together with the supplier of the goods or services you buy, if anything you purchase is faulty. This means you can claim from the credit card company if the supplier cannot or will not compensate you.
9. Can I get interest-free credit on my credit card?
Yes you can, providing that you play the system properly. First of all you need to make sure that you have a credit card which does not start charging you interest from the date of the transactions you make on it. Be wary of cards touting lower rates of interest and lower annual fees. Check when they start charging interest. They may end up being more expensive because you are paying interest from the moment you use the card. What you need it to have a credit card which only charges from the statement date and which only imposes this interest if you do not settle the statement in full. In practice this means you can get yourself a maximum of 56 days, that is almost two months, interest-free credit: your earliest transaction may be up to 31 days before the statement while the card issuers usually allow a further 25 days for payment to be made.
10. So which card is right for me? Are you likely to pay off your bill in full each month?
Be honest! If the answer to this question is going to be yes then what you need is a free credit card, that is one with no annual fee, which has a long interest-free period. You may prefer to pay an annual fee in exchange for some kind of freebie, whether it be "Air Miles" or collectible points and you are going to spend a lot of money. Alternatively you may wish to use your credit card as a way of supporting a favourite charity - check out whether they operate an affinity card. On the other hand, if you are likely to be leaving outstanding sums on the card account each month you need to look carefully at the interest rates which the various card issuers charge. Click here to compare credit cards online to find one that best suits your needs.
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