The Complete Guide to Credit Cards
Most of us have at least one credit card and according to the Money Charity the UK has run up an eye-watering £62.1 billion on plastic (2015). That’s an average credit card debt of £2,325 per household.
A survey by credit report company Callcredit found that more women than men turn to credit cards, not to pay for luxuries but to cover everyday household expenses.
The gender pay gap, insubstantial maternity pay and the economic climate have meant that women are increasingly turning to the plastic in their purse just to make ends meet.
Credit cards can be useful – but only if you follow the rules. If not, they have a sting in their tail and can send many people spiralling into debt.
In terms of debt, credit cards are up there with payday loans as a ‘nasty’ debt, one that can be crippling if not managed properly.
So it pays to arm yourself with as much knowledge about credit cards before you start using them. If you already use them, it’s also vital to know how you can control them, instead of them controlling you.
Credit cards can be useful – but only if you follow the rules. If not, they can send many people spiralling into debt.Click To TweetThat’s where we come in.
Here is our complete guide to credit cards to help you know what you are getting into when that glossy invite drops on your doormat.
THE COMPLETE GUIDE TO CREDIT CARDS
What are Credit Cards?
Credit cards let you spend money by borrowing it from the card company. Every time you make a purchase or pay a bill on a credit card you are effectively borrowing money.
Anyone over 18 can apply for a credit card. They have pre-set spending limits, from a hundred to thousands of pounds, depending on your ability to pay back the debt (i.e. if you have a regular income or other means).
Not everyone who applies will get one, that all depends on your credit score and previous financial history (see below).
Your credit card will be accepted by most companies and retailers around the world. You will be given a PIN number to use the card in shops, restaurants and ATMs.
It’s Not Free Money! Interest and Repayments
When you pay for something on a credit card you are spending money that is not yours. Not only will you have to pay the money you borrow back, you also pay interest on top.
Credit cards have an interest rate called Annual Percentage Rate also called APR that you must pay back on top of your spending.
Interest rates on credit cards vary. The standard rate is around 16% APR but can sometimes be much higher.
Beware of introductory offers of 0% interest and cards with a low ‘advertised rate’ because you may not receive this rate and if you do, once the deal ends the rate could rocket.
There is only one way to avoid paying interest on credit card purchases – pay your bill off IN FULL every month. If you are able to do this then you will only pay back what you have spent, with no interest on top.
Minimum Payment
Danger! Danger! When you spend on a credit card your card issuer will ask you to pay a small amount towards the debt every month, called the ‘minimum payment.’
This is how credit card companies make their money. Minimum payments are set by the lender and are sometimes deliberately low. If you only pay the minimum payment requested, you will be paying that debt off for years, with interest to boot.
Here’s an example
1) You get a new credit card with a 16% APR and buy a designer handbag for £1000.
2) The credit card company asks you to pay a minimum payment of £25. You think great! I don’t have to pay it all back! You pay the £25.
3) But that leaves £975 of that bag you have not paid for.
4) On top of the £975 unpaid, you will be charged interest. You are now at the top of the slippery slope of debt. If you only make the minimum payment of £25 every month – that bag will take 4 years and 8 months to pay off and will incur £392 in interest
So even when it’s gone out of fashion and now lives at the back of your wardrobe or in the charity shop you will still be paying your credit card debt off.
The answer? PAY OFF YOUR CREDIT CARD BILL IN FULL, EVERY MONTH. Then you won’t be charged interest. If you can’t do this you should think very carefully about using credit cards at all. An overdraft with lower interest rates is almost certainly better.
Check out this handy calculator to see what will happen if you only pay the minimum amount.
If you cannot pay off a credit card in full every month – don’t get one.Click To TweetPenalty Charges and Annual Fees
If you fail to pay at least your minimum payment or you go over your spending limit, the credit card company will turn on you.
You will be charged a penalty charge (around £12) and you won’t know it until you get your statement, so ensure you set up a direct debit to cover your credit card bill, preferably in full, or to cover the minimum payment at least.
Remember! Late payments on credit cards can also stop you from getting credit in the future.
Some credit card companies also charge an ‘annual fee’ (between £25-£100 year), usually to be found on ‘cashback’ or ‘reward cards’ (see below). Be careful that the annual fee does not cancel out the 0% introductory offer they used to hook you in in the first place.
What Are The Different Types Of Credit Cards?
From premium, gold to student or business credit cards, there are hundreds of cards on the market all with different rates and deals. Here are a few of the most popular:
Interest-free, 0%
These are introductory offers that allow you to borrow the money, interest-free on purchases for say 12 months, as long as you pay the balance off in full before the deal runs out.
So if you buy a washing machine for £250 on your 0% card that is the amount you will pay back, interest free. But beware! The interest will go up when the deal runs out.
Balance Transfer
Balance Transfer credit cards can help you get out of debt quicker. They allow you to transfer debt from an existing card to one with a 0% or low interest rate so you can pay off the old debt without extra interest and charges. But don’t make new purchases on a balance transfer card – you will be charged interest on those.
Cashback
Credit Cards that pay YOU every time you make a purchase (usually 1%). So a win-win? Only if you pay off your credit card in full every month, if not you will receive the reward AND pay interest on the purchase – a win-lose.
Pre-paid
Pre-paid cards allows you load money onto a card to spend wherever the card is accepted. If you haven’t put any money on the card – you can’t spend it (or borrow it).
Pre-paid cards are good for people who have been refused credit but need the ease of using a credit card in shops, restaurants or abroad. They are also a great way of helping you budget, as you load the card up with your own money, making it easier to keep track of your spending.
How to Get the Best Deal
You can compare credit cards on sites such as moneysupermarket.com or moneysavingexpert.co.uk. These sites show all the cards, rates and deals and have calculators to help you find out how much you will actually pay.
If you are considering getting a credit card you should
- Arm yourself with knowledge and
- Have the means to pay off the card in full, every month.
What is Credit Scoring?
When you apply to borrow money or for a credit card, the lender will look at your official credit file, which gives details of your financial history. They will be able to find out whether you have a mortgage, other debts, or have missed payments in the past.
So when you apply for a credit card, if you have a less-than-ok credit history you may be rejected outright or may not receive the advertised rate on the deal (the rate you get may be much higher). Your can read our handy guide on Credit Score – How it works and why it is important.
Credit Cards – The Pros and (the rather large) Cons
Pros:
- Easy to use – accepted worldwide.
- Safer than carrying cash (especially abroad)
- Buy now pay later (but only if you pay it off in full every month)
Cons:
- High interest rates
- Very easy to get into debt
Avoid the Credit Card Debt Trap
If you cannot pay off a credit card in full every month – don’t get one. If you are already struggling with credit card debt, you should get help straightaway.
There are a number of organisations that can help you formulate a plan to escape debt such as the Citizens Advice Bureau, National Debtline and the Consumer Credit Counselling Service.
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Over to you
What are your experiences with credit cards? Can they ever be good? Are you struggling with credit card debt? Let us know in the comment box below!
This post is part of the Debt Management series, you can read all posts in the series here.
(Photo Credit: ptmoney.com)
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Learning how to stop spending knowing I have a credit card in wallet is my biggest challenge. Maybe, I have never thought of using of pre-paid cards, at least it gives me the feeling of using a card but this time my own money.
Credit cards can definitely be good if you use them responsibly. If you can pay them off each month, then there’s no reason to not use them to reap the cash back or travel rewards.
That being said, if you can’t use them responsibly, then you’re right! Definitely steer clear.
Is your debt situation bad? After all almost everyone has debt in Britain in 2015. Using several cards, balance transfers, paying off the minimum etc can make it hard to tell what is really happening.
One way to find out is to leave your credit card(s) at home for a month. And only use a debit card online, not a credit card or Payplan inked to a credit card.
At the end of the month, how much is there in your bank account? If it’s less than the month before then you do have a debt problem and your debts are probably going up every month. Time for some hard decisions!
Thank you for sharing this Sara. This exercise is really worth trying to ascertain ones level of debt.