Credit cards: the basics
Monday 18 April 2005
Credit cards allow consumers to pay for things they buy on credit, which can then be paid off in small, more manageable amounts each month.
But the convenience and ease of paying for things on a credit card can have its disadvantages. Card holders sometimes find themselves in a great deal of debt after getting carried away with their spending. You could end up paying much more than you originally spent if you only pay very small amounts every month.
Short term fix
It's also important to remember that credit cards are meant to be used for short term borrowing. Unless a credit has a special low interest rate offer, it will generally be cheaper to take longer term borrowing by way of a personal loan.
You can only apply for a credit card if you are 18 years old or above and live in the UK.
APR
If you do decide to get a credit card, one of the most important things to look at what interest rate the card has, otherwise known as the Annual Percentage Rate (APR).
The interest rate on a credit card decides how much money you will be charged each month for borrowing on your card. The lower the interest the rate on the card, the less you will be charged each month.
Interest rates can differ widely. Some credit card firms can have special introductory rates of zero per cent, which means you won't be charged for using it. But if you do apply for a card with a low rate, always read the small print and find out how much the interest grows to when the special offer runs out. Remember, once the introductory offer period has expired, interest at the normal rate will become payable.
Applying
Many people apply for credit cards through their bank and building society, but supermarkets, charities and even universities now have their own credit card services. To apply, you will need to fill out forms with personal information, which the bank will then pass on to a firm that makes a 'credit check' by looking into your financial history.
Credit checking firms, like Experian, check if your address details are correct, if you've ever had any bad debts with other credit card or loan firms. They also find out if you have ever not paid things like electricity bills.
Other cards
'Store cards' are a type of credit card, but you can normally only use in the department store you got the card from. There are masses of different store cards available, but it is always worth checking the interest rate when you apply. These are well known for having higher rates than normal credit cards.
People also use 'debit' cards to pay for goods. These are different from credit cards in that the money you spend on these is taken directly from your bank account and is not 'credit'. Some of the more well known debit cards include 'Switch' or 'Delta'. Purchases made with a debit card are debited from your bank account usually within two or three days, so you must make sure that you have sufficient money in your bank account to pay them.
Debit cards also let you withdraw money from your bank account when paying for goods, but not all shops offer this service. You will not be able to withdraw cash, if there is not enough money in your account.
Charges
As well as checking interest rates for credit cards, it is also important to find out about any additional charges. For example, many credit card firms charge you a set fee if you accidentally miss a monthly payment.
If you ever apply for a credit card or loan, it's important to read through all of the lender's terms and conditions.
