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Credit Card
Information
What is a credit card?
A credit card is a flexible way to borrow. You can use
the card to pay for goods and services (and draw cash
from cash machines, though this is expensive and not
recommended).
Each time you use the card, the amount spent is added
to your account. The balance on the account is the amount
you have borrowed. The card issuer sets you an upper
credit limit and, provided you don’t exceed that
limit, it’s up to you how much you borrow, when
and for how long.
Credit cards are issued by banks, though often they
are branded with another affinity organisations name.
Most cards are in either the Visa or MasterCard network
(these organisations sort out which outlets accept their
cards and settle all the transactions).
How does a credit card work?
The physical process of using a credit card to buy something
or draw out cash from a machine is the same for debit
cards. However, there the similarity ends.
With a credit card, you get a statement each month listing
every transaction you’ve made and showing the
balance of your account. You are required to pay off
at least a minimum sum each month. The amount varies,
but is typically 3 per cent of the account balance or
£5, whichever is higher. You can choose to pay
off more.
Unless you pay off the whole of the outstanding balance,
you are charged interest on the items shown on the statement
including any balance carried over from the previous
month. The interest is added to the following month’s
statement.
If you pay off the balance in full, usually no interest
is added to your account the following month, so you
have an interest free loan from the time you make each
purchase up to the date you pay off the bill in full.
However, there will usually still be some interest to
pay if you have used your credit card to draw out cash.
In addition to charging you interest, card issuers make
money by charging retailers a fee each time they accept
payment by credit card. Small retailers sometimes pass
on this fee by charging you more if you pay by credit
card rather than cash. Larger retailers usually charge
the same price however you choose to pay.
What do credit cards cost?
Credit cards have a reputation for being a particularly
expensive way to borrow, but this depends on the card
you choose and how you use it.
In October 2003, the standard interest rate on credit
cards ranged from 8 per cent up to 25 per cent, depending
on the card. Many store cards
cost even more. So picking up the wrong card can be
an expensive mistake.
However, the cheapest credit cards are often offered
by companies who decide what to charge you based on
your credit standing. This is assessed mainly by looking
at your financial history. If you are young, you will
not usually have had time to build up much financial
history, so you might not be eligible for the very cheapest
rates. Even so, there is no reason for you to put up
with a card charging 25 per cent – shop around.
Playing the Interest free credit card game
Some cards offer low introductory rates - even 0 per
cent – for a limited period. These can be a good
deal, but check that the rate you’ll pay once
the introductory period (typically six months) has ended
is also competitive. If not, be prepared to switch cards
again once the introductory period is up.
If you already have a card, you might be tempted by
invitations to transfer your outstanding balance to
a new card offering a low, or even zero, rate on balance
transfers for a period of, say, six months. This might
be worth doing, but check the detail of the scheme.
Typically, if you also use the new card to make fresh
purchases, you will find that your repayments are set
first against the transferred balance and not the new
purchases. This means that the transferred balance may
be paid off early and you end up paying more interest
than you’d expected. A way around this is to switch
your balance to a card with a good deal on transfers
but use another card to make any new purchases.
How you use your card
Usually, if you pay off your credit card bill in full
each month, you do not pay interest. Used this way,
a credit card is not so much a form of borrowing but
more a convenient way to pay for things. Of course,
you’d get the same convenience by using a debit
card, but a credit card has a couple of advantages:
• You get an interest-free loan from the date
of the purchase up to the date you pay off the card
balance. This could be handy if, say, you are waiting
for your wages to go into the bank.
• For a purchase costing more than £100,
you get extra protection when you use a credit card
under section 75 of the Consumer Credit Act 1974. This
says that, if there is a problem with the goods or services
you’ve bought, then the card company is responsible
as well as the retailer. So, for example, if you paid
for a holiday with your card and the tour operator went
bust, you could claim a refund form the card company.
If you don’t pay off your balance
in full each month, you will be charged interest. Unless
you have an expensive card, this can still work out
as a fairly economical way to borrow for up to a few
months. However, if you borrow for longer it is usually
cheaper to arrange an overdraft
with your bank.
How much do Credit Cards
cost?
This depends on how you will use the card. If you expect
to pay off the bill in full each month, the interest
rate will be largely irrelevant. Instead, you might
look at the length of the interest-free period and what
extras, if any, the card offers. For example, some cards
offer points that you can ‘spend’ on a range
of goods and services or AirMiles. But usually you have
to use the card an awful lot before you clock up enough
points to be worth having. Research by Which? suggests
that the only really worthwhile perk is cash back, where
you get a refund in cash according to how much you spend
on your card.
If you are unlikely to pay off your bill in full every
month, go for a card with a low interest rate –
as measured by the annual percentage rate (APR).
From the end of March 2004, card companies have been
committed to including a summary box on all application
forms and promotional material such as mail shots. The
summary box presents the key features of a card in a
format that will help you to compare one card with another
more easily. The features in the box include:
• APRs and the monthly interest rates
• The interest-free period (if you pay off your
balance in full)
• How your payments are allocated to your outstanding
and any transferred balance
• The minimum monthly repayment
• Fees and charges,
How
to apply for a credit card
Once you have decided on the card you want, phone the
card company for an application form. If it is an internet-based
card, you can usually apply online, though a copy of
the agreement will be posted to you for signing.
If your application is accepted, you will be sent a
card. Sign the back of it straightaway. Separately (for
security reasons), you will be sent a PIN to use with
the card.
Your rights as a credit-card customer
Credit cards are covered by the Consumer Credit Act
1974 which gives card users various rights. In particular,
if your card is lost or stolen and misused by criminals,
the maximum loss you will have to bear is £50.
This protection applies even of you have not taken reasonable
care, for example, to keep your PIN safe. This is different
from the protection applying in the case of debit cards,
where you could be liable for the full loss if you have
not acted with reasonable care, though it would be for
the bank to prove this was the case. In practice, most
card issuers will let you off even the first £50
of losses.
Under the Act, if your card details are misused while
the card is still in your possession, you are not responsible
for any losses. Similarly, you can’t be held liable
if a new or replacement card is intercepted and misused
before it even reached you.
Under European legislation, when you buy something at
a distance – for example, by phone or internet
– using a credit (or debit) card, you cannot be
held liable for any loss due to unauthorised use of
your card details, for example by hackers.
Specialist Credit Cards.
Football credit cards
Support your local football team with an offical club
credit card emblazoned with the club badge and colours
from MBNA. 0% balance transfers for 9 months and no
annual credit card fee:
Arsenal
Credit Card
Chelsea
Credit Card
Manchester
United Credit Card
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