The truth about credit cards
London
12.07.10
According to the British Bankers Association, there are 61 million cards in circulation in the UK alone; the credit card is popular. For those who do not have cards, however, the credit market can be an intimidating place. Below is an essential guide to how credit cards work.
The Basics
A credit card is a form of borrowing. Consumers use credit cards to make purchases, temporarily borrowing the money from their creditor. At the end of each month, the creditor then sends a bill for all of the purchases made on the card. Consumers then have the option to pay off all or some of the amount they have borrowed.
The Costs
Naturally, credit does not come for free. Most credit cards come with an interest free period on purchases, which range from between 40 and 55 days. This means that consumers can pay back what they borrowed within that time period without any interest. After this, their unpaid balance begins to accrue interest. Other costs may also be incurred; if no monthly payment is received, creditors normally add a late payment charge to the account, which is usually around £12 per month.
Changing Interest Rates
The interest rates charged by credit card companies does not normally remain constant. Often, a favourable rate is only available to new customers for a set period of time, which ranges from between three months to a year and a half. After this time period, the interest rate often increases. Additionally, many credit card companies will take away preferential interest rates if consumers miss payments or pay their bill late, charging higher interest than advertised.
Balance Transfers
A major use of credit cards in today’s financial world is balance transfers. This is where a consumer moves their debt with another creditor to a new credit card. For example, a consumer might have £1,000 of debt on a card. After a certain period of time, the interest rate charged by that credit card company is increased, making it more expensive to pay off the bill each month. That consumer is able to then apply for a credit card with a new creditor, and move their debt to the new card. The new credit agrees to transfer the balance, charging a fee of normally around 3% of the debt amount for the privilege. This can work out cheaper than paying the higher interest rate of the old creditor. This can also be done with bank account overdrafts. Balance transfers are not possible between all cards, however; often, credit card companies owned by the same banking group will not allow balance transfers between their own daughter companies, for example.
Repayment
There are various ways in which creditors use the money consumers pay back on their credit card bill. Most card providers operate what is known as a negative hierarchy of payment. This means that they take consumers’ repayments and use them to pay off the cheapest debt first, whilst the more expensive debt remains untouched and earning the card provider more interest. This practice is slowly being phased out, but many card providers are still charging consumers in this way.
Cash Advances
Consumers can withdraw cash using credit cards. This is known as a cash advance. Often, cash advances are charged at a high rate of interest, and there is normally no interest-free period on cash advances, meaning that consumers will start accruing interest on them as soon as they withdraw the money. Some purchases are counted technically as cash advances. For example, buying vouchers or foreign currency is often counted as a cash advance.
Protection
Many credit cards come with purchase protection. This means that, if a consumer uses their card to make a purchase of between £100 and £30,000, they could get a refund from their card provider if there is something wrong with the purchase. This is because under Section 75 of the Consumer Credit act, the card provider may be as liable for the product purchased as the retailer.
Rewards
Some credit cards come with rewards to incentivize new custom. These can come in the form of cash back, discounts with certain retailers, or, most commonly air miles, helping consumers to save money on flights. These cards are often only available to consumers with medium to high incomes, and normally have quite high interest rates, so they are only cheaper if the consumers using them can clear the balance in full each month and are likely to use the rewards.
Credit Ratings
A credit rating or credit score is a value calculated by lenders or creditors, which is used to assess how suitable a candidate is for a credit card. A credit score is calculated using a consumer’s credit history, which is a complete record of their debt and repayments. Various things can affect a credit history. Consumers who have borrowed in the past, but have always made regular repayments, are likely to have favourable credit scores. Consumers who apply for several cards or loans at once, who fail to keep up repayments, or who have County Court Judgements against them are likely to have less favourable credit scores.
To view your credit report, please visit http://www.quickcreditscore.co.uk. To learn more about Rewards Now, please visit http://www.quickcreditscore-
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