It’s possible to have a very love/hate relationship with a credit card. In December, we love them; by January, they make seem rather more problematic!
In the hands of the fiscally responsible, credit cards are fantastic – it is easy to track your spending, you can earn reward points, take advantage of online payment discounts and save on bank fees.
However, unless you are incredibly well disciplined, it is easy just to ‘whack it on the plastic’ and worry about it later. The trouble comes when ‘later’ arrives, and you find that all the little impulse purchases have added up to one large amount and a high interest debt.
Credit cards are available from a wide range of providers, from supermarkets to airlines and even charities.
Applying for a card is simple – applications can be made in a bank branch, on the phone, online or by post. To qualify for a card you will need to give information about where you live, how much you earn and what other credit cards you might have. The card provider will check your history and decide what limit to issue you with. This has no bearing on your ability to pay it off. Often limits are increased automatically, without your income increasing.
If you are able to pay your credit card off in full each month, then you will seldom find yourself in trouble. The trouble comes when you opt to only pay the minimum, while the balance attracts a hefty interest rate. This compounds over time, and can become, as the saying goes, ‘bigger than Texas.’
Interest rates vary from card to card and according to how you use your card – for example, you might pay a different rates for withdrawing cash, for purchases and for balance transfers. Cash withdrawals from an ATM tend to be the most expensive way to borrow; as well as a high interest rate there is often a fee of at least 1.5% of the amount you take out. Most providers also charge this kind of fee if you use your credit card overseas.
Most cards offer an interest-free period on purchases – usually around 56 days – while cash advances tend to attract interest straight away. A number of providers run introductory offers, which include interest-free periods for as long as 20 months on purchases and 33 months on balance transfers. Keep an eye on these offers – if you are careful, they can be very attractive, but remember that credit card companies are in business – these attractive deals are not designed to be long term. The rates once the offer period ends can come with a sting in the tail.
If you have a debt on a credit card you can often save money by transferring your balance to a new card with a low introductory rate. Many card providers offer interest-free balance transfers for a number of months, which could give you a chance to clear your debt without accruing more interest.
While the transfer is interest-free, there will be a fee to pay. This is generally around 2.5% of the total debt being transferred. This means for smaller debts that you expect to pay off within a few months it may not be worth making the switch.
Many cards have some form of insurance built into them, covering damage to goods purchased with the card or cancellation of a flight or holiday. This is free and can be useful if you have a problem with a bought item, but there are usually conditions attached so read the small print if you intend to rely on the cover.