With more than 59.9 million credit cards in use in the UK (BBA Sept 2016) it’s hard to imagine life these days without our flexible friends. Unfortunately, despite their soaring popularity since first being introduced 50 years ago, credit card rules and regulations are not always as clear as they could be – so here are the answers to five of the most common cardholder questions.
1. How many credit cards can I have?
There’s no right or wrong answer to this question as it depends on personal preference. There’s no reason why you shouldn’t have more than one card in your wallet although it’s not recommended to have half a dozen all maxed out to the limit.
Different credit cards have different benefits so, for example, you may have one card specifically for a long term 0% balance transfer deal, another for day to day spending on which you receive reward points or cashback and perhaps a third piece of plastic card tucked away that’s cheap to use when travelling outside the UK.
Just be aware that your credit card behaviours impact your credit score, and they’re also taken into consideration by lenders when you make an application for credit.
Ultimately, having the right number of credit cards is a little bit of a balancing act when it comes to your credit score. Using more than one card, responsibly, can potentially boost your score because it shows you can handle your credit well. However, your credit score could be impacted if you have a lot of open credit cards that you’re not using, even if the balances are nil.
The issue from a lender's perspective is that you still have access to those credit limits and they will take this into consideration next time you apply for credit.
So if you have credit cards in your wallet that haven’t seen the light of day for a while, it will probably improve your credit score in the long run if you close those you no longer need.
2. What happens if I make a late payment?
If for whatever reason you miss or you’re late with a monthly repayment, not only will your card provider probably charge you a fee, but it could potentially have a negative impact on your credit score.
There’s no specific amount that your credit score will be cut by. This is because for each individual credit score, there are lots of factors that are considered from your credit report. So if you regularly make late payments, it’s more likely this single late payment will have a noticeable impact on your credit score. However, if this is a one-off, though it will appear on your report, it may not have much of an impact on your score.
When it comes to late payments, it’s worth bearing in mind that it’s always better for your credit score to try and repay a debt than never paying it back. If you start to miss payments altogether you will eventually be declared in ‘default’ which will have a much greater impact on your credit score and ability to borrow in the future.
3. What is the minimum payment on a credit card?
The minimum payment for a credit card is the lowest amount you must pay off each month if you have an outstanding balance on your card. The amount you have to pay will depend on your credit card company and your total balance. You will be asked to pay either a percentage of your overall balance (e.g. 1%) or a minimum amount (e.g. £5) - whichever is the higher amount. You’ll also have to pay any charges and fees on top of the minimum payment.
For example, if your balance was £1000, and you’re asked to make a minimum payment of 2.5% of the balance or £5, whichever is highest, you would pay 2.5% (£25). But once the balance is reduced to just £10, your minimum payment would be £5.
The idea behind paying the higher amount for a minimum payment is that you’re always working towards paying off your debt. It’s also worth noting that even if you have a 0% interest offer on your credit card, it’s likely you’ll have to make a minimum monthly payment (something worth thinking about if you’re wanting to do a balance transfer of a large amount of money).
4. Why should I pay more than the minimum repayment on my credit card?
Although it seems quite generous of credit card providers to accept a relatively small repayment of your credit card balance each month, if you can afford to, it's best to repay as much of the balance as you can. If you only pay the minimum every month, you’ll find it will take ages to clear your borrowing and the longer you take, the higher your total interest cost will be. Here’s an example which highlights the downside of minimum payments:
If you have a credit card balance of £2,000, borrowed at 18.9% APR, and you decide to only repay the minimum monthly amount (to begin with 2.5% and then £5 when this becomes the higher amount), it will take 91 months, yes that’s right, more than 7 years to clear, plus you’ll pay an additional £1106 in interest charges.
However, by paying just £25 per month extra on top of your minimum repayment you’d clear the balance in 3 years 8 months and save £574 in interest into the bargain.
5. What are the main advantages and disadvantages of having a credit card?
- If you use your credit card responsibly, it’s a great way to build up your credit score by proving you can borrow money and repay it reliably.
- You get legal protection on purchases between £100 and £30,000
- If you’re eligible, you can gain reward points and cashback with some credit cards
- If you pay back your balance in full each month, having a credit card won’t cost you any interest
- Unlike a loan, this is a more flexible way to borrow. You can borrow as much or as little as you need, and pay it off as quickly as you want to.
- It’s easy to forget credit cards aren’t your money and debts can build up quickly if you’re not careful
- If you’re not able to pay off your balance in full, you can end up paying high interest rates, fees and charges
- If you take cash out on a credit card it will be a very expensive way to borrow
- Rewards, cashback and 0% credit card offers are often reserved for customers with only the highest credit scores.