A credit card is a type of bank or payment card that works in a similar way to a debit card but differs in that the money you spend is borrowed from the card provider, whereas a debit card only allows you to spend what is already in your bank account.
A credit card is essentially an unsecured loan; you can borrow money to spend up to a certain limit and then pay it back in the future. There is generally a minimum amount that you must repay each month.
You will be charged interest on the money you borrow on your credit card but exactly how much you are charged, and when the interest kicks in, will depend on the particular card you are using.
There are a wide variety of different types of credit card available designed to suit different particular purposes, and so it’s always important to work out exactly what you want to use a credit card for before you go to take one out.
APR stands for annual percentage rate and is essentially the cost of borrowing money on your credit card if you don’t pay off the balance in full each month.
APR is essentially the interest rate, but goes slightly beyond it insofar as it tends to also account for any other charges or fees that come with your credit card.
It is important to distinguish between representative and actual APR. The representative APR is the advertised rate, but this is only the rate that is given to at least 51% of customers. Since each customer will be assessed independently based on their credit rating, the actual rates offered may, and often do, differ from those advertised.
What is a credit limit?
The credit limit of any credit card is the amount you are allowed to borrow at any one time.
How can I find out my credit limit and other information about my card?
The documentation associated with any credit card will include what is known as the credit card summary box. This summary box will contain all of the information relevant to the card including the credit limit, the APR and detailed breakdown of any associated fees or rewards schemes.
While the summary box should contain (more or less) everything you need to know, if you can’t find the information you need on yours, then get in touch with your credit card provider and they’ll be able to enlighten you.
What types of credit card are there?
Credit cards come in a whole range of shapes and sizes with a whole range of purposes in mind. Almost all cards will fit into one of the following categories:
Standard Credit Card
Standard, low APR credit cards are the most basic kind and don’t tend to come with any extra perks or benefits. These are the kinds of credit cards you should take out if you’re just looking to enhance your financial flexibility and give yourself the option of making purchases that you would otherwise not be able to make given the timing of your pay cheques.
Credit Builder Credit Card
Credit builder credit cards are designed for people with bad credit ratings and come with a high APR and low credit limit, with the idea being that as you use them and pay off the balance regularly and on time, your credit rating will steadily improve.
0% Purchase Card
These cards come with a period of time during which you’ll be charge 0% interest on any money you spend on purchases. After the period is up, interest will start being charged at a higher than usual rate, so it’s important that you try and pay off the whole balance before the period ends.
Certain credit cards will earn you rewards such as cash back for every pound you spend using them.
Many large stores like supermarkets offer credit cards that will earn you certain rewards when you spend money at the designated shop or chain or group of shops.
What is a balance transfer?
A balance transfer involves you transferring the balance from one credit card to another or to any other source of debt, giving you more time to pay off your existing debt without racking up a huge bill because of growing interest.
Specialised 0% balance transfer cards allow you to do so and will give you a period of time, often up to 30 months, during which no interest is charged. This affords you a bit more time to save up the money to pay off the initial debt. You will generally have to pay a one off fee for the actual balance transfer, but this will be negligible compared the amount you’ll save in interest that you’re not paying.
What kind of purchases should I make on my credit card?
Credit cards can be used for any variety of purchases.
They are particularly useful for purchasing expensive items like holidays or white goods since you can do so without having to save up in advance; simply purchase the item on your credit card and then pay back the balance steadily over time.
Certain cards will come with rewards that you can earn on certain purchases in certain stores such as supermarket store cards that are, as such, perfect for your regular grocery shop.
Do I have to pay interest on every purchase made with my credit card?
For the most part, if you pay off the balance of your credit card in full each month, you won’t have to pay anything at all.
It is only if you do not pay it off in full that the interest will kick in. If you have a card that comes with an introductory 0% interest period, then for that whole time, so long as you keep up with the minimum monthly payment, you won’t have to pay any interest whatsoever.
How do I pay off my credit card?
Paying off the balance of your credit card is pretty straightforward and can be done in a variety of ways. You can pay it off over the phone to your card provider; you can do it by post by sending a cheque; you can set up a bank transfer; you can set up a direct debit to pay the minimum each month and then do the rest manually; or you can go into a branch and pay your balance off in person if your card is provided by a bank or building society that has branches you can visit.
Generally speaking, it’s best to pay off as much as you can each month to avoid paying too much interest on the remaining balance. Every credit card will have a minimum amount that you must pay each month if you want to avoid incurring hefty charges.
What is my credit rating?
Your credit rating is essentially your financial footprint; it is a record of all of your past dealings with credit, loans or any similar products. Any missed or late payments will appear as a mark against you on your credit rating. This includes missed payments for any utility bills, subscriptions or even library fines.
You can find out your credit score via one of the credit checking agencies active in the UK such as Equifax or Experian.
Importantly, if you have a limited or non-existent history using credit or any loans, then your credit rating will be the worse for it.
When you apply for a credit card or indeed any kind of loan, your credit rating will be assessed. The better your credit rating, the better the product you will be able to take out, and vice versa.
Can I still get a credit card with a poor credit score?
If your credit rating is poor or limited, you’ll have trouble getting the best deals on credit cards. In some cases you will be turned down altogether and won’t be able to take out a conventional card at all.
If this is the case, you should consider a credit building credit card. These cards, with their typical high APR and low credit limit, will allow you to improve your credit score over time as you use them. This will then stand you in better stead in the future when you want to take out a better form of credit.
How do rewards cards work?
Rewards cards come in a few different forms but broadly speaking they all work in roughly the same way – earning you rewards of some kind for money you spend using them.
The two most popular kinds of reward cards offer cash back and points redeemable on airline flights respectively.
Cash back cards will earn you cash back at a set percentage of the value of any qualifying purchases you make.
Airline points cards will earn you points for every pound spent that you can then redeem for money off airline tickets or upgrades on existing tickets. The two most popular airline point cards earn you either Avios points (formerly known as Airmiles) or Virgin flying club miles.
What is my payment processing company?
Each credit card will be issued by a bank or building society or, in some cases, a store or chain of stores. The actual payment processing though will be handled by a different company, generally VISA, MasterCard or American Express.
To find out which payment processing company handles your card, look in the corner or the card, where the logo should be clearly displayed.
Where can I use my credit card?
Credit cards can, in theory, be used more or less anywhere – you can use them to make purchases in store, online and over the phone.
Bear in mind though that not all credit cards will be accepted in all retailers. This is particularly the case with American Express cards. American Express charge a slightly higher handling fee to the business so you will find that many establishments will not take payments from them.
Can I withdraw cash from an ATM using my credit card?
You will be able to use a credit card to withdraw cash from an ATM but doing so will rack up hefty cash advance fees, and so you should only do so if it is absolutely necessary.
Where possible, you should use your credit card only for making actual purchases, and stick to using your debit card to withdraw cash.
Can I use my credit card abroad?
You will generally be able to use your credit card to make purchases abroad, with the same restrictions as using it at home. However, you will generally be charged a foreign transaction fee at a percentage of the value of each transaction and so it is best to stick with using cash where possible.
Bear in mind that in some cases, these fees will apply to purchases made in any foreign currency, even if you are still at home. For example, if you buy something online and pay in dollars, you may be subject to foreign transaction fees – check with your card provider if you are at all unsure.
There are some credit cards available that will charge 0% on foreign transactions designed specifically for people who travel and use their card abroad often.
I paid for goods or services on my credit card that didn’t arrive or were faulty, can I get my money back?
One of the reasons that credit cards are particularly good for making large purchases is that you benefit from protection under Section 75 of the Consumer Credit Act.
Section 75 protection applies to any purchase made on a credit card that costs between £100 and £30,000 and means that your credit card provider takes on the same responsibility as the retailer does when it comes to providing you with a refund in the event that something goes awry with your purchase.
So, for example, if you book a flight and then the airline goes bust before you are due to fly, then your credit card provider is liable to refund you back the money you spent.
American express cards
American express cards are different from normal credit cards in the way that they operate. Many people still don't fully understand the distinction between them and normal cards. This guide will examine the key differences and what the positive and negatives of owning an American Express card are.
Most of our normal monetary exchanges happen through our banks, however the banks don't control each part of the process. There are a number of companies that link your banks to payments that you make on your debit or credit cards. These companies are normally payment networks such as Visa and Mastercard, who don't give you a card themselves but instead just help to manage the transaction between the shops and the banks.
American Express on the other hand distribute their own cards, fund the transactions that you make and manage the transfer of the money. This service incurs charges from American Express that come in the form of interest or one off fees. They also receive a fee from shops to process their payments.
Benefits of American express
In the past American Express has been associated with lavish lifestyles and luxury living because of its high credit limit and the various perks that came with owning one. They even have an invite only American Express Centurion card that costs its users over £1,000 every year in fees. This card allows its holders to enter numerous exclusive airport lounges, gold memberships at car rental companies and personal shoppers in luxury retailers. Whilst this image of American Express is still fairly prevalent in modern culture, it has started to broaden its audience to a less exclusive demographic. They now offer no-fee American Express cards that allow you to receive cashback and Airmiles every time you make a purchase. There are other additional extras such as car insurance and holiday insurance. Unsurprisingly, American Express also has an excellent customer service and customer satisfaction record. The top level American Express cards have cashback offers of around 5% on purchases made, on top of giving you Nectar Points and Airmiles.
The negatives of American express
The primary drawback of American Express cards is the fact that they charge companies for the payments that they process. This is because they have their own payment network and don't rely on companies like Visa and Mastercard. This means that some businesses, especially smaller ones, may not accept American Express. In other cases, such as online shopping, you may have to pay a little bit extra in order to use one.
Another thing to be aware of is that American Express' additional extras often only last for a limited period. This means that you won't be able to enjoy the benefits of things like Airmiles or cashback for that long. Most of these offers are introductory offers that expire after a certain amount of time. Some of the offers do last beyond an introductory period but there are often minimum spends that are required in order to qualify for them.
Essentially when taking out an American Express card with nice introductory offers you should bear in mind that after these offers expire the card acts just like a normal credit card. This means that with the higher fees that they charge, you could end up paying more for the card than you save with the offers.
Should you get an American express?
When considering an American Express card it is important to be aware of how you are going to use it and if you are going to get your money's worth out of the extras it offers.
If you get an American Express that comes with car insurance, you will only benefit from this if you don't already have car insurance taken out. Similarly if the card you get allows you entry to exclusive membership clubs, you need to seriously consider whether or not you will ever make use of this feature.
On top of this, it is important to consider whether or not you are going to spend enough on the card to meet the minimum requirements for the offers to apply. If you don't generally spend as much as they need you to, then it is hardly going to be economical to increase your spending just so you can take advantage of these offers.
One more thing that you should consider when weighing up the option of an American Express is the fact that they tend to have higher interest rates than other cards. This is how reward credit cards make the most of their money back from their customers. This means that you should be extra careful not to leave outstanding debts on your card, beyond the interest free period.
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