Having a credit card these days is almost a necessity not only because of the convenience of not having to carry cash around but also because of the positive impact it can have on a person’s credit rating and all of the rewards you can claim by using one.
*It is important to note though that, while using a credit card in the correct way brings many benefits, poor planning and reckless over-reliance on credit cards can lead to far more negatives that outweigh any potential benefit. Be responsible when using a credit card, do not over-stretch yourself and know what your limits are.
In this article we will endeavour to guide you through the process of choosing the right credit card for your needs. We will discuss interest payments and how your choice of card can massively impact the amount you pay, credit limits, minimum repayments, balance transfers, reward cards, cards for people with bad credit and more.
Credit cards, in effect, allow you to pay for things in shops or online using cash belonging to the card issuer. This is different to how debit cards work where you can only ever spend your money (unless your account has an overdraft facility).
At the end of each month the card issuer will ask that you repay the amount you spent (or borrowed) on the card and will charge interest on your debt if you do not pay the balance in full (unless you have a 0% on purchases deal).
Working Out The Interest You Have To Pay
First of all it is important to remember that if you pay off your credit card in full at the end of each month you will not be liable to pay any interest at all so if you are able to do this then it is highly advised.
If you have a remaining balance on your credit card then you will be charged interest at an annual percentage rate (APR) set by the credit card company. It is these APRs that you should be using to compare credit cards on a basic level and all issuers are required to inform you of the APR when you apply.
It is commonplace for major banks such as Lloyds TSB, Santander and HSBC to offer their customers credit cards on a regular basis (indeed this is an even more regular occurrence with internet banking) but it must be said that they rarely offer the best deals in the marketplace.
A misconception that credit card holders often make when calculating the interest they will pay comes about when it comes to the date interest is charged from. While many card companies offer an interest free period during which repayments can be made without penalty, after this date passes interest charges come into play. While it may seem logical to assume that the interest is calculated on the balance from the day this period ends, it is more common for interest charges to be calculated from the date of each transaction.
So if you purchased your weekly shopping on the 1st of the month and didn’t pay off your credit card at the end of the month, you would pay interest on the grocery shop from the 1st and not from the date your statement is issued.
Your Credit Limit Needn’t Be Your Actual Limit
When you successfully apply for a credit card, the issuer will give you a credit limit based on various factors and this is the total amount you can borrow on a cumulative basis – i.e. it is not a limit for each month’s spending but rather a total amount owed to the issuer.
Some people are given a credit limit far above their needs or current monthly spend but it is important to realise that just because you now have access to a greater level of funding than before, YOU DO NOT HAVE TO SPEND TO THE LIMIT, in fact it is often very dangerous to do so.
The credit card company have calculated an amount that they believe it is safe to let you borrow based on your credit history among other things but you should be aware of your own financial situation and your ability to pay back the amount your spend at the end of each month.
Your credit limit is subject to change. Card companies will occasionally review your personal circumstances and, based on your history of repayments and changes to your credit file, they may increase your limit. You can also request an increase from your credit card issuer at any time though they will only agree if the figures show an increased ability to repay what you borrow.
Minimum Payments – What You Should Know
Come the end of each month you can choose how much to repay on your credit card (the best outcome being a full repayment of course) but card issuers will almost certainly insist that you fulfil a minimum repayment which will usually be the higher figure between a percentage of your spend and a fixed amount set by the card company.
These minimum payments are often very small in size but not paying them can result in more expensive penalties either in the form of charges/fees or in the respect of losing certain benefits you received when you signed up (for instance they could take away your 0% on purchases or balance transfers and revert your account to the standard rates which will be much higher).
It is never advisable to only pay the minimum amount on your credit card bill as this will result in further interest accruing on the remaining balance. Even if you cannot repay your bill in full it is advisable to repay as much as possible to avoid the interest building up into a “problem amount”.
Choosing The Right Card – It’s A Matter Of Repayments
When you are looking around for the best credit card deal you need to think carefully about your ability to repay and indeed whether you intend to pay off what you spend straight away.
Getting The Best Introductory Rates
If you don’t think you are going to be able to pay off your credit card bill at the end of each month then you should find a card with a low standard rate or preferably one with a 0% on purchases introductory offer.
If you have outstanding credit on an existing card then you might be able to defer your repayments by getting a new card with 0% on balance transfers. If you are currently paying interest on your existing balance then you can cut this down dramatically with a 0% balance transfer card and actually begin to pay off the balance rather than watch it grow each month.
You will probably have to pay a small fee for transferring your balance to the new card (2.5% isn’t uncommon) but this one off charge will almost certainly leave you better off in the long run as you reduce your balance and thus the interest payments you were forking out for on your old deal.
If this 0% period runs out and you still have an outstanding balance to be paid simply look for and switch to another card provider offering a similar interest free introductory offer.
If your new card has 0% on balance transfers but not on purchases, it is quite ok to have more than one credit card so find one that has 0% on purchases and use that for buying things and the other simply as a method for repaying your debt.
Cashback, Rewards, Air Miles & Other Benefits
If you have ever wondered why people with sufficient balance in their bank account use credit cards rather than a debit card the answer is simple: you can get a great number of extras and incentives when you use a credit card.
The most obvious form of reward that card issuers can give their customers is cashback. What this basically means is that for every pound you spend on your credit card, the issuer will give you back a small percentage. This percentage can be as high as 5% but this might only apply to the first few hundred pounds your spend on the card after which the cashback reduces considerably. Other cards will offer a fixed 1% – 2% for spend that occurs in supermarkets for instance or certain department stores while offering a lower percentage for all other purchases.
Air Mile Credit Cards
Another very popular type of reward, especially with regular travellers, is air miles whereby you receive a certain number of miles free travel for every pound you spend. Big spenders can find themselves jetsetting across the world for free if they build up enough miles. Be mindful that some air mile cards limit which airlines you can fly with so look for one which covers multiple airlines and the routes they encompass.
Certain big supermarkets and department stores have their own credit cards which give you points for every pound you spend. The number of points you receive for shopping in that stores usually outweighs the points received for all other general shopping which is a way to encourage you to shop with them over their competitors.
If you regularly shop there anyway, these types of store credit cards can actually be a good option assuming you pay them off each month (as their interest rates are hardly the best on the market).
Other Benefits You May Receive
Some credit cards will offer even more benefits but be careful, these cards may charge annual fees for the privilege. Some additional benefits may include:
- purchase protection insurance
- extended warranties over and above the manufacturers warranty on certain electrical items
- a very basic form of travel insurance
Choosing A Credit Card When You Have Bad Credit
If you would like to have a credit card but have bad credit you have to look at a special set of cards.
Certain card providers such as Vanquis do offer credit cards to people with bad credit but will charge a much higher rate of interest.
You might be asking yourself why you would want to opt for a card with such an interest rate over just using cash but used in the correct way these cards can actually be used to build you credit rating up again if you repay what you spend every month.
Alternatively you could opt for a prepaid credit card which will not charge you any interest because you have to load up the card with funds before you can use it. They are common among young people and are also useful when travelling abroad. Read our complete guide to prepaid credit cards here.