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Credit Card Guide


What is a Credit Card?


A Credit Card is a simple way of obtaining credit (debt) and used wisely can provide flexibility and convenience. If used unwisely it can be a financial millstone around your neck. Credit Cards were meant to provide short term finance to the Credit Card user not to act as a long term loan. Unfortunately too many people have gotten into the habit of using these financial products in the wrong way.


Ultimately you should be aiming to have a Credit Card with no balance. If you don’t pay it off each month it is a very expensive way to borrow money.


What Should You Look for in a Credit Card?


This will depend on how you use it and what your personal circumstances are:


  • If you pay off your balance every month you could get a Credit Card that offers cash back on purchases.

  • If you sometimes carry a small balance on your Credit Card but pay it off eventually you could take advantage of a Credit Card with a 0% on purchases and look for a card that has a low interest rate known as the Annual Percentage Rate (APR) when the offer ends.

  • If you always have a balance on your Credit Card you could take advantage of a Balance Transfer offer which can be 0% for a limited period. Beware of the APR when the offer ends.

People apply for Credit Cards with the promise of low - sometimes 0% interest rates but your personal circumstances and financial situation are the most important factors to consider when deciding which card is best for you.


As always with any financial product, it is up to you to check the small print, a 0% interest rate may only last for 6 or 12 months and then jump to an interest rate of 19%. If you miss one monthly payment during the offer period you may lose the 0% balance transfer interest rate and go on to the cards standard payment terms. The Internet makes it easy to shop around to find the best deals but you need to ensure that the deal really does suit you.


If You Pay Off Your Balance Every Month


If you use your Credit Card for everyday purchases such as petrol and groceries and you never carry a balance over to the next month the interest rate becomes irrelevant. You can avoid paying any charges by choosing a card with no annual fee. You need to ensure that the card you choose has an interest-free period, and that you always pay before that period ends. Some Credit Cards offer up to 59 days interest-free, and you can ensure you are always on time with your payment by setting up a direct debit with your bank for the full amount each month.


However, it can be worth having a card with a small annual fee that offers incentives like Air Miles on the amount spent or cash back on purchases. You will effectively be being paid to use your Credit Card.


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If You Sometimes Carry a Small Balance on Your Credit Card


The Credit Card is used regularly for everyday purchases as well as the odd luxury item and though you try to pay it off in full each month you don't necessarily mind carrying a small balance over.


In this case the APR is far from irrelevant. To ensure that you don't pay too heavily for not paying off the balance each month you should make sure that you go for a Credit Card with no fee and the lowest Annual Percentage Rate (APR). You could also take advantage of a 0% on purchases offer, just make sure that the APR in not too high when the offer ends.


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If You Always Have a Balance on Your Credit Card


In your case you are the Credit Card providers dream customer but it may well be a nightmare for you. They make their money from people like you. Your need to ensure they make as little as possible while you try to clear your balance.


You need to search for the lowest interest rate you can find. An introductory balance transfer rate can sometimes be as low as 0%. However that rate will revert to the Credit Card provider’s standard rates when the introductory period is over. You will need to look for a new Credit Card provider before the offer ends to ensure you do not end up stuck on the Credit Card provider’s higher standard rate.


If you are trying to clear a balance, it's important to note that unless you are paying no interest at all most of the minimum monthly payment will be swallowed up by the interest. It will also take a lot longer to clear the outstanding debt if you are only paying the minimum amount each month. Paying a larger amount than the minimum each month will ensure that your debt is paid off sooner. Should you be unable to pay off the balance on a Credit Card in the longer term it may be worth considering taking out a personal loan to pay it off.


No matter if you are on a Balance Transfer Deal or you have taken out a personal loan to pay the Credit Card balance you need to stop using the Credit Card. The sooner you can get rid of this debt the better off you will be. Carrying a balance on a credit card in the long term is financial suicide.


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What is the Difference Between Standard, Gold and Platinum Credit Cards?


A Gold Credit Card or a Platinum Credit Card once held a certain prestige and conveyed a certain status but these days in the main there is little difference between them and Standard Credit Cards. Some providers do offer different incentives and rewards on their Gold or Platinum Credit Cards but anybody can apply for them and in reality anybody with a sound credit history and a regular income can have a Gold or Platinum Credit Card.


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The Monthly Payment?


You are required to make a monthly payment to any outstanding balance on your Credit Card. You might think that the monthly payment would pay off the outstanding balance and it would go towards the oldest charge first or that it would pay the highest interest rate element of the balance first. However this is unlikely to be the case. This is known as the "payment hierarchy".


If you have transferred a balance to a new credit card to take advantage of a balance transfer offer of 0% and any new purchases are charged at their standard rate of 18%, the monthly payment will likely go towards the balance transfer first and you will therefore retain the amount spent on new purchases on your balance charged at 18%. If you take out cash on a Credit Card it will attract a fee and a higher rate of interest and that element of your Credit Card balance will be the last element to be paid off.


As always with financial products be sure you have read and understood the small print.


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Should I use my Credit Card on holidays abroad?


Credit cards can be a more convenient and safer than openly carrying cash but they may also turn out to be a more expensive option. Don't expect to get the same rate of exchange as you would from your bank - Credit Card providers will add a percentage to whatever its own rate is, so you pay more.


People use Credit Cards abroad to withdraw cash at cash machines, however, cash advances from a Credit Card are expensive. Almost every card charges a higher interest rate on cash advances. Also if you take cash out abroad you are subject to an exchange rate set by the Credit Card provider. If that wasn’t enough you could possibly have to pay a handling fee for the transaction.


However, many cards offer benefits for travellers and there are one or two that don’t employ the tricks detailed above. These can range from discounted travel insurance to protection on purchases, fast replacement of lost or stolen cards and general assistance for travel delays.


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Applying for a Credit Card


Applying for a Credit Card is similar to applying for any sort of loan. The Credit Card provider will evaluate your personal circumstances: income, outgoings and any existing debt into account, including outstanding loans and balances on other Credit Cards. They will also carry out a check on your credit history to see if you have had credit problems in the past.


It is possible to check your own credit history through credit references companies such as Experian www.uk.experian.com or Equifax www.equifax.co.uk for a nominal fee. You should be able to query or correct any errors on your file that may be preventing you from obtaining credit.


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Credit Card Agreements


Credit card agreements are governed by the Consumer Credit Act 1974. The Act licences lenders and instructs them to show the true cost of credit to customers. It also protects consumers against "extortionate" rates of credit. It is questionable if it achieves the second of these goals there are a number of Credit Cards on the market with extortionate rates of interest.


If you are having trouble making repayments on an outstanding balance contact your Credit Card provider immediately. The earlier you contact the Credit Card provider the more able they will be to help. They may suggest a different payment schedule or an alternate card with a lower interest rate. Don't leave it too late as a bad credit record can affect any future credit agreements you wish to enter into. Ultimately you may be refused credit.


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What is a Store Card?


A Store Card operates in the same way as a credit card but you are limited to using the Store Card in certain shops or a chain of shops. They are promoted in store, often with a promotional offer of a discount on your first purchase. If you are buying an expensive item like furniture this can be a good saving and may be worth doing if you can pay the balance off in full. However most store cards have a sting in the tail, a card offering 15% off with the first purchase may be carrying a rather nasty APR of 29% or more.


In comparison to a Credit Card a Store Card is inflexible and expensive which is really going some when you consider that Credit Cards are expensive anyway. It is hard to believe they still exist as financial products. If you have one or know anybody with one and it has a balance, tell them to pay it off and cut it up. If you don’t have one, keep it that way.

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