Credit Card
Basics
Credit cards can be used as a form of borrowing, to purchase
goods and services, to obtain cash advances and for consolidating
debt. For the majority of credit cards, interest is charged
if the balance is not paid in full by the 'payment-due date'.
With some cards you can benefit from up to 59 days’
interest-free credit depending upon when your purchase is
made. Some card providers charge an annual fee which can be
waived in certain circumstances.
A specified credit limit for each cardholder is agreed at
the outset and depends upon individual circumstances. It can
be regularly reviewed.
Most credit card issuers insist on the cardholder paying
a minimum amount each month or paying a percentage of any
outstanding balance each month. There is usually a penalty
for late or returned payments or for exceeding any personal
credit limit
Introductory Rates
Credit cards may offer introductory rates that are lower
than the standard interest rate for a specified term. This
introductory rate is usually for purchases and balance transfers
but it may also apply to cash advances. It is advisable to
check the terms for clarity.
The interest rate charged on cash advances is usually not
the same as for purchases. There is usually a fee for using
your credit card to obtain cash. Many of us do not realise
that when we use a credit card abroad the card issuer usually
adds on a foreign usage loading fee. We also need to consider
the fact that if we are withdrawing cash whilst abroad we
will also be charged our usual cash withdrawal fee.
Balance Transfer Rates
Balance transfer rates are applied to existing card debt
that is being moved from one issuer to another or a consolidation
of other debts. These rates tend to be lower than standard
rates and apply to the debt transferred or consolidated for
a specified term or until it is repaid in full. A fee for
this may also be charged by the receiving card worked out
as a percentage of the transferred balance.
For cardholders who pay off their balance in full each month
there are other benefits offered. Cashback is available on
some cards where a cash reward is calculated as a percentage
of spending. This is mainly available only on purchases. Loyalty
points are a way of gaining a benefit from using your card
and can be used in varying ways. Other cards offer benefits
such as free travel accident insurance, discounts on holidays,
or free purchase protection insurance (particularly useful
if buying over the Internet or by telephone).
Things to watch out for:
1. Balance Transfer Fees. Until recently credit card providers
were clambering for transfers to attract new customers. Now
that customers are taking full advantage of the 0% deals and
moving on swiftly to the next card, a number of providers
have taken to charging up to 2.75% per transaction.
2. Penalty Fees. If you pay late, go over your limit or
one of your direct debits/cheques is unpaid then most providers
will charge you. Some card providers have now amended their
small print, which allows them to terminate your preferential
rate deal and put you on a more expensive deal if you are
late with a monthly payment.
3. Minimum Repayments. The minimum amount that the lender
requires to be repaid each month can vary between 2% and 5%.
Beware, if you only pay 2% of your outstanding balance each
month, you will barely cover your interest charges and it
will take you years to pay off your balance.
4. Direct Debits. Direct debits are a great way to ensure
that you avoid the late payment fees. A lot of lenders only
allow direct debit payments for the minimum amount or the
full amount, whereas others will let you specify a percentage
of your balance or a fixed monthly amount. To shorten the
term, plump for a card that will allow a fixed percentage
or amount to clear your debt early.
5. Cash Interest Rates. Many cards that offer low rates on
purchases may charge you much higher rates on cash. Using
your credit card to withdraw cash can prove expensive, as
you will be charged a withdrawal fee as well as the potentially
higher rate of interest.
6. Cash Withdrawal Fees. In addition to the higher rates,
cash withdrawals also incur a charge of around 2%, usually
with a minimum flat charge. As this charge is levied for each
transaction, ensure you are using your card effectively by
not making lots of small withdrawals.
7. Balance Transfer Dates. Not all cards start the clock
ticking on balance transfer deals from the same date –
some will apply from the date the card is issued, some from
the date of the first transfer. To get the longest term go
for a card deal that waits until the money hits your new account.
Also make a note in your diary at least a month before the
expiry date of your 0% deal as you may need to take out a
new card or personal loan to repay any balance still outstanding.
8. Order of Repayments. Most cards order their repayments
so you will always pay off the most expensive transactions
last. If you make a 0% balance transfer then spend on the
same card which accrues interest, your repayments will pay
off your 0% deal first, leaving the interest on your purchases
to build up. However, some lenders are the good guys here
as they apply your repayments to the most expensive debt first.
9. Interest Free Days. These are the maximum number of days
you are allowed before you pay interest on your transactions.
Check that your card offers interest free days, especially
if you always pay your balance off in full. There are some
cards that will charge you interest from the card transaction
date even if you do pay in full.
10. Payment Protection. Many cards offer payment protection
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). If you do take out the insurance,
check you are eligible for the benefits and also that it is
worth the cost.
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