10 things you need to know about credit cards
Most of us will have a credit card at some point in our lives, whether it is to help pay for a one-off major expense, or to cover general living costs, so it's important to understand exactly how they work.
Here, we take a look at 10 things everyone should know about credit cards...
1. The advertised rate is not necessarily the rate you will be offered
Credit card companies are obliged to show a representative annual percentage rate (APR) when advertising their cards. This rate has to be offered to at least 51% of customers who apply for the card, which means the remaining 49% may be offered a different rate altogether.
2. A credit card can cut the cost of existing debts
If you have store card debts or are being charged a steep rate of interest on an existing card, you may want to consider switching these balances to credit card which offers a lengthy 0% introductory period on balance transfers. But remember to factor in any balance transfer fees as these can have a big impact.
3. The best deals go to those with impeccable credit history
Tempting as lengthy 0% introductory offers on balance transfers and purchase may be, the chances are you will only be eligible if you have never missed any debt payments in the past.
Card providers reserve their best deals for those with excellent credit scores, so if you aren't sure if yours is up to scratch it's probably worth getting a credit report from one of the credit reference agencies such as Experian or Equifax before you apply.
4. Making too many credit card applications can damage your credit rating
Every credit card application you make adds another 'footprint' to your credit file. If you make several applications, this could adversely affect your credit score and your credit rating, so only apply for a card if you are confident you will be accepted.
5. You can still apply for a credit card without a perfect credit history
Many people assume they will be refused credit altogether if they have defaulted on payments in the past. However, you can get credit cards which are specifically designed to help you rebuild your credit rating. Often referred to as credit builder or bad credit credit cards, these enable you prove to lenders that you can manage your debts responsibly, so boosting your credit score and making it more likely that you will be accepted for other forms of credit later on.
6. You must make a payment every month
With credit card debts, you can't just pay a bit off now and then when it suits you. You must pay something off the balance every month. If you do miss a payment, you'll be charged a penalty fee of £12. It could also harm your credit score, making it harder to borrow in the future.
7. You should try to pay off more than the minimum payment every month
If you only make the minimum repayment on your credit card each month, it will take you many years and cost you hundreds or potentially thousands of pounds in additional interest.
For example, someone with a balance of £1,500 on a card with an average APR of 17.31%, making only the minimum repayment of 2.5% each month, could take 19 years and three months to clear their debt.
To add insult to injury, they would also end up forking out an extra £1,590 in interest payments in the process.
8. Some cards reward you for your spending
If you pay off your credit card balance in full every month, then you can take advantage of one of the many cards that offer cashback or rewards when you spend. Rewards are usually in the form of Avios miles or shop loyalty scheme points, which can then get you money off your shopping.
9. You shouldn't use your credit card to withdraw cash
Avoid using your credit card to make cash withdrawals, as you will start paying interest on the amount you've taken out immediately. Interest charged on cash withdrawals is usually much higher than the rate charged on normal spending, typically around 25%-30% and you'll generally have to pay a cash withdrawal charge of between 2% and 3% as well.
What's more, interest will be charged from the day the withdrawal is made so even if you pay your balance off in full each month you can't avoid it.
10. You get extra protection if you pay with a credit card
If you buy anything costing from £100 up £60,260 and pay with a credit card, you have more protection than if you pay with cash, debit cards or cheques. The reason is that under Section 75 of the Consumer Credit Act, when you use a credit card, the card issuer is jointly liable if something goes wrong. That means if the retailer goes bust or your goods are faulty you can claim a refund through the card provider.
The content on this page is supplied by MoneySupermarket.com
Disclaimer: Any content in our family money section is intended as general information only. For specific advice about your personal financial situation, get advice from qualified, independent, regulated professionals.