If you are good with your money read our 3 Types Of Useful Credit Card article. But first here are the Be Clever Basics:
1. WHAT’S A CREDIT CARD?
When you spend on a credit card you are borrowing that money from the card’s issuer. You are agreeing that you will pay a percentage of interest on that amount until you’ve paid the full amount. These rates can be quite high. They will also give you a credit limit – the maximum amount you can spend on the card.
If you bought a coat for £100 on a card with a rate of 19.9% APR and a mimimum monthly repayment of 3%, you’d take two years to pay it off and pay an extra £20.13 in interest.
Put a £1000 holiday on the same card and it would take you over 14 years to clear the debt. Plus it would have cost you a whopping £1,038 in interest!!
2. WHAT’S APR?
Though you are charged interest monthly, this stands for Annual Percentage Rate – the percentage of interest you will pay on the amount borrowed over the whole year. You pay a lower rate each month. You also pay interest on the previous month’s interest at the same rate (this is called compound interest). So the earlier you pay something off, the less you pay in interest.
Often the published APR is the average rate people will get. They may charge you a higher (or lower) rate, depending on your credit rating. More on APR in our 8 Interest Basics guide.
3. PAY THE FULL AMOUNT
Saying that, interest rates on cards are a nightmare, so the only way to use them is to pay them off in full each month, ideally with a direct debit, avoiding all interest!
4. SHOULD I GET ONE?
Can you handle it? This means are you able to only use it when you know that you can afford to pay it off. Though it seems like free money, treating them as such to get something you can’t afford is dangerous. That leads to debt and certainly isn’t clever money.
If you know you can manage one, read our 3 Types of Useful Credit Cards article.
5. I’VE ALREADY GOT CC DEBT
If you already have a debt, one way to deal with it is to apply for a balance transfer card. For a fee, these cards will take on your debt from another card and not charge you interest for an agreed time. After that you’ll be paying some very high rates.
Right now this is really competitive and you can get 0% interest deals for 30 months. Of course the longer the deal, the higher the fee. If you think you can pay it off in 18 months you can reduce your fee from around 3% to under 1%.
Plan how you’ll pay it off in that time, or you could try to switch it to another 0% BT card at end of the deal. Put a note in your diary a month before it ends to remind you.
The fee is a percentage of the total balance you want to transfer. So for a balance of £1000 with a 3% fee, you pay £30.
Don’t spend any more on these cards, hide it in a drawer!
6. HOW MUCH IS A MINIMUM REPAYMENT?
Transferred balances don’t just sit there. You have to make minimum repayments each month. These are calculated as a percentage of the card’s balance or a set amount, whichever is higher.
As you pay off a card, the balance reduces and so does the minimum repayment. This makes it take longer to clear the debt.
So you should set your repayment as higher than the minimum. In fact you should pay as much you can afford, and plan to pay enough each month so that it’s cleared by the end of the deal.
Miss a payment and the provider might terminate the deal, meaning you’ll start paying the full interest amount on the balance. You’ll probably also get a charge of around £12.
Set up that direct debit!
7. YOU’RE CREDIT CHECKED EACH TIME YOU APPLY
Each time you apply for a card, the provider will check your credit report. If they don’t like the look of you, you might not get the advertised deal – or even be rejected outright. If you are planning on getting a mortgage in the next three to six months, avoid any new applications.
8. CANCEL UNUSED CARDS
If you’ve switched to a new balance transfer or you’re just left with an old card that you don’t need, make sure you call up the provider and cancel it completely.
Cutting it up means you can’t use it, but it’ll still show on you credit file and could make you look like a risk. However, it is useful to have at least one card on your file (Read our 3 Types Useful Credit Cards article).