Credit Cards

Credit cards can be a tremendously useful tool, enabling us to quickly replace faulty equipment, pay for unscheduled expenses and even enjoy an occasional treat.

However, if used improperly, credit cards can be a source of misery to the card-holder, enmeshing them ever deeper into a mire of debt with little or no benefit. Before you commit yourself to taking out a credit card, here are some things that you should know.

First of all, the amount of credit you are awarded and the rate of interest that you will pay on purchases is decided on the results of your credit report. A generous limit and small APR will ensue after a top-scoring report, while a high rate of interest and relatively low limit will be awarded to those with some blemishes in their financial past. Anyone with a very poor history will have their application for credit turned down – no lender wants to give money away for free!

APR stands for Annual Percentage Rate, and refers to the rate of interest that credit card holders will pay on the outstanding balance on the card. In the UK the APR for a representative selection of credit cards ranges from 12.9 percent to 59.9 percent. It is very easy to see, even for those not talented at mental arithmetic, that the APR charges can make an enormous difference to the amount paid back over time.

Credit cards are very versatile, and provide a layer of protection between the card holder and any potentially unscrupulous dealers. If you have a dispute about any product or service that the vendor refuses to deal with to your satisfaction, you can raise the dispute through to your credit card provider. They will use their resources to mediate with the vendor, and if they can see that you have a valid point, and have tried your best to resolve the issue, they can withhold payment from the vendor, ensuring that you do not have to pay for a service or product with which you were unhappy. Another excellent use for a credit card is when you travel abroad. Depending on the type of card you carry, you may be able to use your credit card while on holiday, thereby negating the hassle of trying to exchange one currency for another, and also ensuring that your funds remain safe – if your card is stolen you can get it shut down quickly, while if cash is stolen, it is gone forever!

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The downside of credit cards is that they cost the holder money, but a careful card user can ensure that they do not pay too much to the card provider! Some cards come with an annual fee, usually around £20.00 or so, this will have to be paid. If you clear your balance every month you can avoid paying any interest to the card company, which essentially allows you to buy on credit for free. Default charges for missed, late or short payments can add greatly to your monthly bill, as well as have a negative impact on your credit report. Default charges are around £12.00 each time, and need to be paid in full on the next month's bill.

Using your credit card to withdraw cash is occasionally unavoidable, but really should be a last resort. Not only do cash withdrawals go straight into incurring interest, there will be a cash withdrawal fee of around 3 to 5 percent. Customers who regularly withdraw cash from their credit card may find their provider lowering their limit – it is one of a number of warning signs that can mean that the card user is struggling financially. If you absolutely have to have cash, rather that credit, inquire about a money transfer. This works in a similar fashion to a balance transfer (where the credit card is used to clear a balance on a loan or other credit card, usually at a preferential rate of interest for a set period) but puts cash into a bank account, from where it can be used for the desired purpose, without incurring any excessive fees or ringing any alarm bells.

The best way to handle a credit card is to use it sparingly, and clear the balance in full, if not as soon as the bill is ready, then as quickly as possible. Paying only the minimum payment each month can see the debt being serviced for years and years, with the balance hardly changing at all!

Barclaycard, Virgin and MBNA all offer very competitive cards, ranging from 12.9 percent to 18.9 percent. Barclaycard offers a fantastic introductory rate with 0 percent on balance transfers for 28 months, and 0 percent for purchases for 6 months, essentially giving the card holder a very generous period of time to sort out debts and reduce the balance substantially before incurring any more interest on it. For those with a poor financial backstory, such as bankruptcies and CCJs, there is still hope of acquiring a credit card. Vanquis, Aqua and Black Diamond all boast of offering credit to those needing to rebuild a good credit score, and will often award a card when no other company will – however they do so at a cost! Interest rates run between 39.9 and 59.9 percent, and there is usually no balance transfer deal, nor do they allow for great lengths of time before beginning to charge interest (around 59 days is the maximum.)

There is sure to be a credit card out there for everyone, however when applying for your credit card, be sure that you fully understand your responsibilities and the effect that poor management may have on your financial future.