Credit Cards

Credit cards are a form of borrowing that may be used to buy goods and services and to obtain cash advances. Credit cards can be a very useful and convenient way to pay for almost everything you buy - providing that you pay off the outstanding balance every month. There are high penalty fees for not paying off the minimum monthly balance.

For most credit cards, interest is charged if the balance is not paid in full by the due date. This means that depending on when you make your purchase, you may be able to get up to 59 days interest-free credit. Some card providers charge an annual fee, which can be waived in certain circumstances.

Although you only have to pay off a small amount each month (sometimes less than 1% of the outstanding balance), you can end up paying a very high rate of interest, making a credit card a very expensive way to borrow.

Interest Rates

There are a number of different interest rates offered by credit card companies:

Introductory Interest Rate

Many credit card companies will offer an interest free (or very low APR) rate for all new purchases for a limited period, usually between 6 to 9 months, although you may find some deals that last for up to a year.

Interest Rate on Credit Balance Transfers

The interest rate quoted by different companies can ranges from 0% to 4% above base rate. This low rate applies only to the debt you transfer from other credit cards, and then only for a limited period of around 6 to 9 months.

Standard Interest Rate on New Purchases

This is the rate you will pay over the long term and is usually much higher than other loan rates, sometimes up to 25% APR.

Interest Rate on Cash Withdrawals

The interest rate charged on cash advances is usually higher than the one used for purchases, often between 16-26% APR. cash advances do not normally benefit from any interest free period - interest will be charged as soon as you withdraw the money, even if you clear your balance in full each month. There is also often a fee for using your credit card to obtain cash - often around 2% of the amount withdrawn.

Choosing Your Card

If You Pay Off Your Monthly Balance

If you always pay the full balance of your credit card every month, then you need to find out what other benefits your card will give you - cash back, air miles, loyalty points, free travel insurance, or free purchase protection insurance (particularly useful if you want to buy over the Internet).

If you do pay off your balance in full every month, make sure you do it in plenty of time, allowing time for delays in the postal system. It is also very easy to miss a payment if you are away on vacation when your statement comes in. If you miss the pay-by-date, you could end up paying the penalty for missing the minimum payment as well as the interest on the balance. The best thing to do is to choose a card that will give you the option to pay off the whole balance every month by automatic payment.

If You Pay Less Than the Full Balance

If you think that you might be tempted not to pay the full balance when your credit card statement arrives, ask yourself the following questions:

• Do you really need to borrow using your credit card when most other forms of credit are cheaper?
• If you do, make sure that you shop around for the card with the best interest rate. It will be worth changing your existing card, as there are now wide variations in the rates charged.
• After you switch your card, you will sometimes get the first few months at a 0% or low rate on the transferred balance, and possibly on new purchases as well. If you have the time, you might think about switching cards a couple of times a year to carry on taking advantage of these offers. Make sure you finally end up with the card with the lowest rate for new purchases.