Whether you’re looking to take your time paying off a big purchase or simply getting your hands on some free rewards just for spending as you normally would, a credit card can be a great tool for managing your finances.
The trouble is, credit card providers are often guilty of bamboozling borrowers with all sorts of weird terms. But fear not - we are here to simplify.
Some credit cards come with a fee which you will need to pay once a year to continue using the card. This is generally restricted to rewards cards.
APR stands for Annual Percentage Rate. It’s essentially what you pay to borrow via your credit card, as it covers both the actual interest rate and any fees you might have to pay.
If you don’t have a great credit history - perhaps because you have missed the odd payment in the past, or you’ve simply never had credit - then you might struggle to get the market-leading offers.
But there are some cards designed for people with bad credit - sometimes called credit builder cards - which will help you improve your credit score.
You can move your outstanding debt from one card to another. This is called a balance transfer.
Some cards offer lengthy interest-free periods on transferred balances, meaning you can pay off your debt in manageable chunks without being charged any interest.
You might be able to withdraw money from an ATM using your credit card. This is known as a cash advance. However, be warned - the interest you’ll be charged for an advance is often larger than when you simply make a purchase using the card. What’s more, interest will be charged from the day you make the withdrawal - you won’t benefit from the usual interest-free period which may apply for purchases.
A cashback credit card is a type of rewards card. You earn a percentage of your spending back in the form of cashback, which is usually paid back to you on an annual basis.
These cards are really only suitable for people who clear their balance in full every month, otherwise the interest charges on outstanding debt will quickly erode any cashback you’ve built up.
When you take out a credit card, you’ll be given a credit limit. This is the maximum balance that you can run up on the card.
You can ask your supplier to increase this limit if you need more; if you have had the card a while and always made your repayments on time, then your supplier may offer to increase it too.
When you apply for a credit card, the card provider will calculate a credit score for you based on your history of handling credit. This will encompass everything from previous cards, whether you’ve ever missed a payment on your mobile bills, whether you’re on the electoral roll and a host of other factors.
The better your score, the better the chances of being accepted for a card.
If you default on a debt, it means you have failed to pay it back. So if you don’t make a credit card repayment on time, you are said to have defaulted.
When you apply for credit, a ‘footprint’ is left on your credit history. It doesn’t say whether you were accepted or not, just that you applied. If you have lots of footprints on your recent credit history, then a lender might be wary about lending to you.
Thankfully, some card providers will give you an indication of how likely you are to be accepted without leaving a mark on your credit history.
Foreign transaction fees
Using your credit card on your holidays can be an expensive business, as you may incur some nasty foreign transaction fees.
However, other cards are specifically designed to appeal to those who go overseas regularly and so do not charge these fees.
There are two interest-free periods to bear in mind. Most cards will provide you with an interest-free period after you receive your monthly statement in which to clear the balance without having to pay interest. This is typically up to 56 days.
However, many credit cards offer an additional interest-free period - in some cases of above three years - on purchases or balance transfers.
The selling point is that you can then pay off that debt every month in small payments, confident that every penny is going directly towards reducing your debt rather than on interest charges.
If you borrow via a credit card and don’t pay it back in full in your next repayment - and you aren’t in the middle of an interest-free period - then you will be charged interest.
Some credit cards will offer a lower interest rate in the first couple of months, with the rate increasing thereafter.
This is the minimum you need to pay towards clearing your outstanding credit card debt each month. For example, it might be 3%, meaning each month you will have to repay at least 3% of your card balance.
Remember that only paying the minimum each month means that clearing your debt will take much longer and cost you a significant amount in interest payments.
Some credit cards allow you to carry out a money transfer. This is where you transfer some of your credit into your bank account. It can be a useful move for people struggling with an expensive overdraft.
This is how much you still owe on your credit card. You will then pay interest on top of this balance if you are outside of an interest-free period and don’t clear the entire balance in your next payment.
You might have received a letter in the post from a card provider suggesting that you are “pre-approved” for one of their cards. You should be wary though – this could be marketing based on old information, and without the lender actually having access to your credit record.
So while the letter may claim you are pre-approved, you aren’t actually guaranteed to get the advertised card at all.
When comparing cards, you might see a ‘representative APR’ figure listed. This is important; it’s the rate that at least 51 of successful applicants must be offered.
However, that still means plenty of people who are accepted will actually be offered a higher interest rate, usually because their credit rating is not quite spotless.
Some credit cards offer a form of reward when you spend with them. This might be cashback or loyalty points, for example Clubcard, Nectar points or Avios.
These cards are only really suitable if you clear your balance in full each month; otherwise the interest charges will soon wipe out the value of any rewards you build up.
If you carry out a balance or money transfer, then you will generally have to pay a transfer fee. This is calculated as a percentage of the balance you are transferring.
We know there’s quite a lot there, but by paying close attention to some of these terms when they appear could save you a great deal in the future.