Credit Cards – Your Flexible Friend
A credit card is a payment card that enables the cardholder to purchase goods or services on credit up to a credit limit.
You can use the card to make basic transactions, which are then reflected on your bill and charged interest at the end of the month.
Top Tip! Be careful using your credit card on contactless transactions – they add up, and you can easily spend money off the wrong card if you’re not careful. This could lead to a surprise bill at the end of the month.
Choosing a credit card
When deciding which credit card to choose the first thing to look at is the annual percentage rate (APR). The APR allows you to compare one card with another at a glance, but it does mean it might not match up with how much it actually costs you as this depends on how you use the card.
The APR makes several assumptions:
- All your purchases are at the interest rate that will apply once the introductory period has ended.
- You use the entire credit limit on day one and repay in equal monthly instalments over a year, without any further transactions.
Alongside the APR you should also look at the individual interest rates for purchases, cash advances, balance transfers and how long the introductory period lasts.
Deciding on the right credit card for you
When deciding on the type of credit card you want you should think carefully about what you want from having a credit card.
Do you want to improve your credit score through using a credit card for small, easily repaid purchases? Do you want to transfer several expensive credit card debts onto one cheaper rate? Or are you more interested in cashback or air miles bonuses associated with some accounts?
Knowing how you’re planning to use a credit card will help you to identify your best options.
There are several different cards available to choose from:
- Standard/gold/platinum/black cards – These cards are more exclusive and based on how much you earn with bonus features such as air miles, travel insurance, or concierge service.
- 0% Balance transfer credit card – This type of card allows you to transfer a debt from an existing card to a different account or provider. Normally you’ll get charged a 3% fee for a balance transfer.
- Interest free credit card – These types of cards offer 0% on purchase deals for a limited time, with the longest deals now standing at 27 months. These are useful for large purchases.
- Cash back credit card – These cards allow you to earn while you spend on the credit card.
- Prepaid card – With these cards you can only spend the funds you have preloaded on to them.
- Low-rate credit cards – This type of card charges a low APR but does not have the same features as the cards above. This card is best used by people expecting to use the card infrequently and won’t pay off the bill in full.
Understanding credit card rates
You should be aware that there are several different types of rates associated with credit cards:
- Standard rates – These rates are your regular credit card rates. They are part of the contract you agree to when you accept a credit card. These rates can still change based on your credit history or market conditions. Your credit issuer will notify you first and explain the reason for the increase or decrease.
- Variable rates – These are rates liked to an index, such as London Interbank Offer Rate (LIBOR). These rates can go up or down as the index changes. You should check with your account when your rates update, typically the updates are made quarterly or monthly.
- The penalty rate – This rate is imposed as a result of late payments.
- Cash advance rate – This is the rate charged when cash withdrawals are made from an ATM. These are normally charged at a higher rate of interest.
- Promotional rates – These are temporary rates that encourage you to use your card. This rate has an expiration date, and you should check what the rate is once the promotional period ends.
Top Tip! Credit cards are very convenient and work well if you repay the balance either each month or over three or four months. Unless you have a low-rate deal on your credit card, you are likely to be very much better off applying for a personal loan to repay your credit card. The interest rate on a personal loan will be lower than a credit card – effectively saving you money on your debt.