Credit Cards

Credit cards let you choose how much you borrow (subject to an upper limit) and how quickly or slowly you pay back the loan.

Compared with most other types of borrowing, credit cards are very convenient. Once you have a card, you simply use it to pay for goods and services without having to request a new loan each time.

Credit cards are issued by banks, though lots of other organisations - for example newspaper groups and motoring associations - have teamed up with a bank to offer their readers or members an own-brand credit card. The complicated system of making sure credit card payments all reach the right destination is handled by specialist organisations, such as Visa and Mastercard

Credit card Charges

Each month, you receive a statement setting out what you have borrowed using your credit card - this is made up of your purchases made during the last month using the card, any balance carried forward from the previous month and any interest charged.

If you pay off the whole amount you owe, usually there is no interest charge. So, provided you pay off the full balance every month, credit cards give you interest-free credit for, say, a maximum of 56 days.

If you do not pay off the full amount, you are charged interest on the whole lot. Different cards work in different ways, so interest might be charged from the statement date or from the date of each purchase.

Each month, you must pay off at least a minimum amount - for example, £5 or 3% of the balance, whichever is greater. If you miss a payment, there may be a penalty charge.

A few cards charge an annual fee - say, £10.

Credit cards Charges - APRs

What you pay for a credit card can be expressed as an 'Annual Percentage Rate' or APR. An APR takes into account:
the interest you must pay;
any annual fee you must pay;
when and how often you pay the interest and any fee.
You do not need to know how to work out an APR. The important thing is that APRs show the cost of borrowing on a standard basis. So you can compare one APR with another.

The APR also lets you compare the cost of credit cards with other types of borrowing. Of course a loan with a lower APR is cheaper than a loan with a higher APR.

The APR does not take into account charges you might have to pay, such as a charge for missing your monthly repayment.

To lure customers away from competitors, many card issuers offer special, low introductory interest rates - for example 1% a year for the first six months or even 0%.

Check the small print of these offers carefully. Often, it applies only to any balance you transfer from another card, not any new purchases you make. And, your repayments are set first against the transferred balance, not against new purchases, so you might not get the benefit of the offer for the full six months.

Credit cards Charges - paying the minimum

If you pay only the minimum amount each month, it can take a very long time to pay off a credit card bill.

For example, suppose:
you have a debt of £1,000;

• interest is charged at 18% a year; and
• you pay off a minimum 3% (or £5 if greater) of the outstanding balance each month.
• It would take you 13 years to pay off the whole balance and your repayments would total £1,772.
  

Although credit cards can be a convenient and cheap way to borrow for a short period as they usually have a period of free credit (25 to 50 days). However, they are an expensive way to borrow over the long-term.

Credit Cards Terms

Credit cards come with a lot of small print. Particular areas to check are:

• What is the period of free credit?
• From when is interest charged - the statement date or the date of purchase?
• Will you be charged if you miss a monthly payment? How much?
• Is there an annual fee?
• What happens if you can't keep up even the minimum payment?

Since March 2004, picking out hte main terms and comparing one card to another has become easier because advertisements, mailshots and websites usuall include a 'summary box' setting out the main features of the card in a concise, standard format.

Credit Cards Risk

The biggest risk with credit cards is running up debts you can't afford to repay.

Making only the minimum payments each month is an extremely expensive way to borrow.

If you don't keep up at least the minimum payments, the issuer can demand that you pay off the whole outstanding balance immediately. If you can't do this, the issuer could take you to court. The court would probably order you to make regular repayments based on what you can afford or could allow the lender to seize and sell some of your possessions to recover the debt.

You are likely to find it hard to get another loan or credit card if you have a court order against you.

Store cards

Most store cards work like credit cards, except:

Charges

The interest rate is usually higher than credit cards.
Usually there is a small reduction in interest if you agree to pay monthly by direct debit.

Terms

You can use them to buy things only in certain shops;
You may qualify for special offers, such as discounts and late shopping nights.

Risk

The special offers might increase the temptation to overspend.

Store cards - Budget cards

A few store cards are a bit different from credit cards. They are called 'budget cards' (or 'revolving credit').

You agree to save a certain amount each month and can borrow a set multiple of the amount you save.

For example, if you saved £10 a month, your spending limit might be up to 24 x £10 = £240.

Charges

• Similar to other types of store card and usually high compared with ordinary credit cards. Terms
• There is usually a minimum you must save each month - for example, at least £5 or at least £10;
• You can use the card to buy things only in certain shops;
• You may qualify for special offers, such as discounts and late shopping nights. Risk
• The special offers might increase the temptation to overspend.

Credit checks

Before giving you a personal loan, a credit card or a store card, the provider will check your creditworthiness. Usually, this involves:

A credit reference agency

The provider will check the file the agency holds about you. This includes publicly available information, such as your address and whether you have any county court judgments against you (court orders to repay your debts). It also includes information about other loans you already have and whether you have kept up the payments on those. You have the right to check your credit file - the FSA Consumer Information site tells you how to do this.
Credit and Debt

Credit scoring

The provider asks you questions about, for example, your employment status, how long you've lived at your current address, your income, whether you have a bank account and existing credit card. You get marks for each answer and these are totted up to find your score. Provided your score is above an amount set by the issuer, you qualify for the card. The issuer will not tell you how its scoring system works or what you scored.

If the provider thinks you are a bad risk - in other words, there's a big chance you might not keep up the loan repayments - you might be given a card but with a low credit limit or refused a card altogether.