Credit Cards

What it is....

We now live very firmly in a credit driven society. It is general practice to buy things now and pay later and the easiest way to do this is with our ‘flexible friend’ (a credit card). Although credit cards are readily made available to most of us, by no means are all people eligible for the same deals.

  • Those people with an unproven or poor credit rating may have to pay substantially more in interest than those with a good rating or may not qualify for a credit card at all.
  • The responsible customer is frequently enticed to change his or her credit card provider with 0% balance transfer deals for a fixed period of time and even 0% deals on new purchases as well. These are really good, worthwhile deals and represent the cheapest credit that’s available.
  • Those of you who have missed a payment will unfortunately miss this opportunity as you will not be entitled 0% balance transfer deals and you will be left paying through the nose for credit.
  • If you are a student you are unlikely to have a proven credit history and will rarely, if ever, qualify for the 0% cards. For this reason the student credit card has been made available.
  • Whatever your status it is worth doing some homework before you commit yourself to a specific credit card. http://www.moneysupermarket.com has a free smart search engine, which will show you the deals that are best suited to your current situation.

Student Credit Cards

  • You have to be at least 18 to get one.
  • These are aimed specifically at students and there are now quite a few lenders in the market.
  • If you are careful you can get up to the first 56 days interest free.
  • Because they are aimed at students they have low credit limits – generally around £500. Although this may seem to be quite small it will prevent you racking up too much debt.
  • There may be some exclusive discounts available to certain student credit card customers with shops and clubs in the area.
  • As you are protected  by Section 75 of the Consumer Credit Act, your credit card lender will reimburse you if any goods over £100 turn out to be faulty.
  • There may well be some freebies attached to the card such as:
    • Air-miles
    • Extended warranties on electrical equipment
    • Able to use your credit card abroad – some even give beneficial, low cost  foreign exchange deals.
    • Purchase protection if the goods are lost or stolen on the way home.
    • You can boost your credit rating by using the account properly.
    • Free ID fraud-prevention
    • You may even get cashback each time you use the card.

But

  • The APR will be high – higher than on standard credit cards. But don’t forget that you only pay interest on your outstanding balance after your payment. So if you pay your balance off completely each month there will be no interest to pay.
  • There are no 0% APR deals available.
  • The minimum payment will be higher to cover the higher APR.
  • There maybe unwanted payment protection insurances added to your account.
    • Check the statement regularly and query anything that doesn’t look right or that you haven’t ordered.

Remember as alternatives to credit cards you can take out a student loan or a student current account with a 0% overdraft. These are both cheaper forms of borrowing money.

General credit cards

  • The APR of these cards may vary. Check the deals on offer carefully before signing. Again remember that you only pay interest on the balance that you don’t pay off each month.
  • Some cards have a 0% APR on balance transfers from other cards for a period of time.
  • Others may have 0% APR on new purchases for a period of time.
  • Some may even have both. These are generally called all-rounder cards and are some of the most sought after deals on the market – especially if the 0% period is quite long.
  • Some cards may have unwanted payment protection insurance included.
    • Check your statement carefully each month.

Storecards

  • These can only be used in the group of stores that issue them.
  • There maybe some loyalty reward scheme tied in with the card.
  • They generally have a very high APR.

Managing you credit card account

  • Don’t use a credit card for everyday living – it’s too easy to lose track of what you’ve spent and it might come as a nasty shock at the end of the month.
  • Always set up a direct debit to make the minimum payment every month.
  • If you miss a payment it will cost a minimum of £12 in charges plus it will have a negative impact on your credit rating.
  • The minimum payment is either 1% of the outstanding balance + interest for the month + default charges + pro-rata annual fee OR £5 (whichever is greater).
  • This means that as your debt decreases so does your minimum payment, therefore it takes much longer to pay off your debt.
  • This means more cost for you and more profit for the lender!
  • Set up a direct debit for the minimum amount in the first month and keep this amount fixed for future months – the final repayment costs will be lower and you will repay the debt quicker.
  • Don’t have too many dormant cards – cancel unused ones.
  • Always keep an eye open for a cheaper deal but be realistic, there is no point in applying for cards that you have no chance of getting. It will be a waste of time and may damage your credit rating.

0% Cards

If you are lucky enough to get one of these deals, there are some points to follow to ensure that you get the most from the deal and don’t waste all of your savings after the deal expires.

  • Try to pay off your debt before the 0% deal expires.
  • Ensure that you know when this is – diarise it.
  • If you think you won’t be able to repay the debt within this period then look to switch the balance of the debt to another 0% deal before the current one expires. Don’t try this too often though as ratings agencies soon get wind of it and you might find that it has a negative effect on your rating.

Charge cards

Charge cards are associated with a bank account, however they do have a credit limit attached to them. They will give you the same spending power as a credit card but any balance on the card will be transferred to your account either weekly or monthly in full. This means that you will need enough money in your account, or a big enough overdraft limit, to cover the balance on the charge card.


Debit cards

Debit cards have no credit limit. Instead, money comes out of your account as soon as you make the purchase. You need to ensure that you have the money or the credit on your account before you make the purchase or it will be rejected.


Prepayment cards

These are becoming really popular. An amount of money is transferred onto a smart card which is then used in place of cash. The card can be used in shops and on transport to make payments using a chip and pin system. When all of the money on the card has been used up, it can be topped up again online. SQuidcard (www.squidcard.com) is aimed at students - it means that they don't have to carry around cash.

Wize Tips


  • Use a cost comparison site such as www.moneysupermarket.com to find the most suitable deals on the market.
  • As soon as you open a new card set up a direct debit to make sure that you that you never miss a minimum payment.
  • Alter the direct debit to a standing order in order to pay a fixed amount each month, as much as you can reasonably afford - you will pay less interest and repay your debt quicker.
  • As soon as you have built up a good credit rating look to switch to a 0% deal.
  • Repay your balance before the 0% deal expires.
  • Check your statement carefully each month and be sure to query any unauthorised payments such as payment protection insurance.