Credit cards offer a convenient and flexible way to pay for goods and services. They differ from debit cards, which draw from existing funds like a bank account. A credit card, as the name implies, draws upon credit provided by your card issuer. In effect, you are borrowing from the card issuer every time you use your card. For many cards this borrowing is free as long as you pay the bill in full each month by the date provided.
There are a number of simple hints and tips which you can follow to ensure that you can get the most from your card:
- It is not a good idea to apply for too many cards. Constant switching/rejections can have negative impact on your overall credit rating.
- Always try to make more than simply the minimum repayment when possible. Simply making minimum payments will only mean that it will cost ultimately cost you more and take longer to pay off overall.
- It is a good idea to avoid using your credit to avoid cash if at all possible. Rates will often by very high and interest is likely to start accruing instantly.
Choosing a credit card
There are many different factors that may affect your decision when choosing a card. The interest rate and any annual charges applicable can be important, but the length of any interest free period for purchases may be even more important if you are planning on paying your balance in full each month.
Balance transfer rates, credit limits and incentive schemes may also provide reasons to choose one credit card over another. Every card has its own pros and cons and choosing the right one for you depends on your own personal circumstances.
Paying your bill
Your monthly bill will have a payment due date. If you pay the full balance by this date you will not usually be charged anything for using your credit card. Do not forget to allow time for your funds to clear depending on your method of payment. You will also have an option to pay a minimum amount. This will be a proportion of the total amount you owe and may vary from card to card.
If you do not pay the full amount you will be charged interest on whatever remains and if you do not pay the minimum amount, you may incur extra charges. Paying only the minimum amount each month can lead to you paying more in the long run.
You can pay your bill when it is issued or you may choose to set up an alternative method of payment such as a Direct Debit. You can set up your Direct Debit to pay the minimum amount, the full balance or a set amount each month. You can also make additional payments over the phone or online. When setting up a direct debit you should check when your bill or statement will be due each month. It usually makes sense to have your Direct Debit activate on this date, or at least between the statement and the payment due date.
Balance transfers
Card issuers will often offer attractive interest rates on balance transfers, particularly for new customers. This rate may even be 0% for a set period of time and it applies to balances transferred from an existing credit card to your new credit card.
A balance transfer may save you money in the long run, especially if you are planning to pay off a balance over a period of several months or longer. There is typically a fee for arranging a balance transfer though. This is usually a proportion of the amount transferred and this is added to your new balance. Transferring £1,000 with a 3% fee, for example, would cost you £30 and your new balance would be £1,030.
Credit card incentives
Many card issuers offer incentives for using their products. These can vary greatly between companies and individual cards. These may include:
- Cashback – Some cards offer a cashback scheme in which you receive a percentage cash bonus for every pound you spend. If the card offered a 1% cashback, for example, you would receive £1 for every £100 you spend. Cashback offers often do not apply to balance transfers and cash advances.
- Charity donations – For every pound you spend, some issuers will make a donation to a named charity.
- Vouchers and reward schemes – For every pound you spend, you may earn points that can be redeemed for various rewards.
- Insurance and extra coverage – As mentioned above, all credit cards offer certain consumer protection benefits. Some issuers may offer additional protection such as travel insurance or purchase protection insurance that can cover purchases made with the card against theft, loss and accidental damage for a specified period.
The value of any incentive scheme will vary depending on your personal circumstances. They can certainly provide a nice bonus but you should carefully weigh their benefits against other factors such as interest rates and charges before making a decision.
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