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Credit Cards - the Basics
Our Online Card Buys *
| Typical APR Variable | Max Int Free | ||
|---|---|---|---|
|
14.9% | 56 days |  |
|
14.9% | 56 days | |
|
14.9% | 56 days | |
|
15.9% | 56 days | |
|
15.9% | 50 days | |
| * Based on Lowest Standard Rates and is not a full search of the whole market | |||
How the best credit cards work, how interest is charged and how much you should pay off each month. Whether cheap credit cards make sense for borrowers and how the best credit cards rules provide you with extra consumer protection.
- What's the difference between debit cards, charge cards and credit cards?
- What about store cards and so-called affinity cards?
- How much should I pay off each month?
- Are cheap credit cards an easy way to borrow?
- How is interest calculated on my credit card account?
- Are "gold cards" the best credit cards?
- All the best credit cards seem to have the same symbols on. Why is this?
- What are the advantages of buying goods with a credit card or can I just get cash out?
- Can I get interest-free credit on my credit card?
- So how do I decide the best credit cards for me?
What's the difference between debit cards, charge cards and credit cards?
You could 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 The cost of anything purchased with this card or any money withdrawn from the bank will be taken from your account more or less immediately.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. However, you will be required to settle in full each time you are sent a statement of the account, usually monthly. Even so-called cheap credit cards, on the other hand, are a form of potentially open-ended 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.
What about store cards and so-called affinity cards?
The main reason to have a store card, which is just a credit card issued by a particular retailer offering credit in its chain of stores, is if the retailer does not accept other credit cards. In general terms you should be wary of store cards, they can and, in some cases, do charge up to a third as much again in interest as ordinary credit cards.
Affinity cards operate like other 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.
How much should I pay off each month?
Most credit cards will stipulate a minimum payment of £5 or a small percentage, say 3% or 5% of the outstanding balance on your credit card account. Beware that some credit card issuers stipulate an even lower minimum payment of just 2.25% or the total of charges (interest, insurance, handling fees etc) plus £5, whichever is lower. This is not a way for you actually to save money. Obviously, the less you pay off, the more interest you are charged.
Are cheap 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, ultimately, a very expensive one. Annual interest rates of more than three times the current bank base rate are by no means unusual among the big names among credit card issuers.
How is interest calculated on my credit card account?
This can be very confusing, especially when you are trying to decide between competing 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 (as of May 2007), this monthly interest charge will be between 0.75 and 1.5 per cent, giving us an annual interest rate spread of 9 to 18 per cent (there are both cheaper and more expensive cards around but most fall within this broad range).
However, some apparently cheap credit cards quote low or zero interest introductory rates as a come-on to get the customers in for periods of between 6 and 12 months. If you see tempting offers like this, think coolly 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? Do remember that with a zero interest introductory rate you must still make at least the minimum monthly repayments.
Yet other cheap credit 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 which is designed to tell you the true cost of borrowing, 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.
Are "gold cards" the best credit cards?
Credit card issuers will tell you that a gold credit card is indeed one of the best credit cards to have - a status symbol that says something about you. In reality, all it says is that you are probably earning more than the national average wage and that the issuer has decided you are a better than average credit risk.
A gold credit card tends to have a higher credit limit than ordinary credit cards and will allow you to draw more cash out on a daily basis. However, there may well be some advantages to having a gold card in the shape of the various extras, such as insurances, which usually come free with the card. Of course, these policies are not really "free", you may be paying for them through a larger annual fee.
All the best credit cards seem to have the same symbols on. Why is this?
There are literally hundreds of different cheap credit cards on the market (and some not so cheap!) 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 that you will see on your credit cards and in shop windows.
What are the advantages of buying goods with a credit card or can I just get cash out?
Cash withdrawals, even on otherwise cheap credit cards are usually more expensive than store purchases. Many credit cards 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 credit cards for purchases is the extra protection you get. Under section 75 of the Consumer Credit Act 1974, customers who have a claim against a supplier for breach of contract or misrepresentation will generally have an equal claim against the credit card issuer. This means you can claim from the credit card company if the supplier cannot or will not compensate you.
For section 75 to apply, certain conditions must be met. Most credit card purchases will be covered, but the cash price of the goods or services must be more than £100 and not more than £30,000. Purchases are not covered if they are made by debit cards or by charge cards.
Credit card cheques are not covered because they can be made payable to anyone - not just to the suppliers appointed to accept the credit card. The credit card company would also not share liability if the card was used to withdraw cash to pay for the purchase.
In March 2006, the Office of Fair Trading (OFT) won a landmark victory when three judges of the Appeals Court overturned a previous High Court ruling in November 2004 that the consumer protection given by Section 75 of the Consumer Credit Act 1974 does not generally apply to overseas transactions. What the OFT's victory means is that the rules do apply to overseas purchases and to internet purchases just as they do to domestic purchases.
Giving the opinion of the Appeals Court, Lord Justice Waller said, "There is nothing in section 75(1) or (2) that provides for a distinction to be drawn between transactions entered into in this country and transactions entered into abroad, to say nothing of transactions entered into on the internet, the place of which may be quite difficult to determine."
Can I get interest-free credit on my credit card?
First of all you should look 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. The best credit cards will offer you an interest free period before you need to make your payment, providing that you play the system properly. Do be wary of allegedly cheap credit cards marketing lower rates of interest and lower annual fees. Check when they actually start charging interest. They may end up being more expensive because you are paying interest from the moment you use the credit card.
The best credit cards to look for are those that only charge interest from the statement date and that 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.
So how do I decide the best credit cards 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 you should look for one of the really cheap credit cards with no annual fee and which has a long interest-free period. You may, however, prefer to pay an annual fee in exchange for some kind of freebie, whether it be, for example, "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. In this case, the best credit cards you'll find will be affinity cards - check out with your charity of choice whether they operate an affinity card scheme.
On the other hand, if you are likely to be leaving outstanding sums on your credit card account each month you need to look carefully at the costs you may face. The best credit cards for those of us who carry a spending balance forward each month may not necessarily be those with short introductory interest-free periods but those with a long-term low fixed rate.
31 July 2007 © Moneyextra.com
Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.