A Quick Guide To Credit Cards
Credit cards are a convenient method of obtaining credit and, despite some bad press, when used properly they can provide flexibility & a range of useful benefits for the cardholder. Our three step guide to credit cards tells you all you need to know about your plastic friends.

Related sections:

• Compare credit card rates
• Conquering debt

Choosing the right card(s)
To get the most out of your credit card it's important to decide whether it's actually suited to the purpose for which you intend to use it. It's surprising how many people use a card that doesn't fit with their spending or repayment habits, and as a result end up paying more than they need for the privilege. A credit card is a useful tool if you make it work for you, but remember you can always save money in interest charges by finding a better deal - the market's awash with them at present. Beware though, card issuers do have tricks up their sleeve and often manipulate their terms & conditions in order to claw back interest in other ways. The best way to avoid such tactics is to use a different credit card for each different purpose, that way you'll be getting the most out of your credit card for as little cost as possible. So which card is best for you? Our guide to spending and repayment habits may help you to decide.

• Regular spender; balance always cleared in full each month

You're often using your card for purchases - perhaps it's the household shopping or your trips to the petrol station - but you clear the debt in full each month. Under these circumstances the interest rate charged is irrelevant unless there's no interest-free period, in which case you'll pay interest regardless of how quickly you clear your balance. Many cards offer an interest-free period of up to 59 days from the date of the transaction, which gives you some breathing space before your payment's due. Choose a card with no annual fee and decide whether you'd like to earn a reward or cash back, but ensure the scheme on offer gives you a worthwhile return on your spend. Both cash back and reward schemes come in all shapes and sizes and as a result some are more generous than others. One of the best ways to guarantee you'll always clear your outstanding balance is to set-up a direct debit for the full amount each month.

• Regular spender; balance usually cleared in full each month

So you like spending on your card and you're pretty good at clearing your balance from month-to-month but just occasionally you choose to carry a balance forward. It doesn't sting quite so much if you've prepared in advance by catering for this very situation. In this situation it makes sense to choose a card that offers a low standard rate, that way interest charges for those months when it is applied aren't too hefty. Choose no annual fee, and if possible select a card with a reward or cash back scheme. It's worth noting that these schemes are not always available on the cards with the lowest rates so do your calculations before you opt for one.

• Regular spender; balance rarely or never cleared in full each month

If you're regularly using your plastic and rarely or never repay the debt in full your best bet is a card with an introductory purchase rate or an ultra low standard rate. Choosing a credit card with a low standard rate will help to save you money if you can't be bothered shopping around when the introductory period expires. In addition, if you've built up a debt on your existing card then it's time to consider switching to a credit card also offering a low balance transfer rate. There are plenty of cards offering 'double deals' - a low introductory rate combined with a low balance transfer rate (often 0% for both), although the duration of the offer will vary so it's worth shopping around. Depending on the deals on offer, two separate cards for your purchases and balance transfers shouldn't be ruled out. If you do opt for an introductory rate then you'll need to change to a new low rate credit card once that deal ends, otherwise you'll pay interest at the standard rate. There are cards with long-term balance transfer deals and if you think you'll be a bit slow to switch then these may be your cheapest option.

• Existing debt which you're determined to clear

If you're determined to clear your outstanding balance - a typical credit card debt in the UK in 2003 was £2,200 (Source: Credit Management Resource Centre) - you need to assess just how long it'll take you & how disciplined you'll be with your repayments. If you're only covering the minimum payment each month then your debt could potentially take years to shift as you'll be repaying little more than the monthly interest charges. Pay off a fair chunk on a monthly basis and you'll be clearing capital as well as interest, and ultimately your debt will be reduced far quicker. Either way, it's important to find the card that'll help to save you the most money. There are always plenty of cards offering 0% on balance transfers, usually over a term of 5 to 9 months. Switching to a 0% card really makes sense because all the repayments made during this period will reduce the capital outstanding, therefore the outstanding balance will be much lower at the end of the introductory period. Ideally, once one introductory offer expires you'll transfer your balance to a new card and as a result will continue to avoid interest charges.

As an example, a person transferring a £2,000 balance from a credit card with a standard APR of 14.9% to a credit card offering 0% for 9 months would reduce their outstanding balance by £630 providing they repaid £70 per month and did not add to their balance. During the nine months they'd also save £202.55 in interest charges, proving that transferring your balance to a 0% credit card really does pay.

If you suspect you'll be a little slow to switch when the introductory period expires then a card with a low rate guaranteed for the life of the balance could well be your best bet. Whichever card you choose remember that any new spend will be charged at the standard rate and, in the majority of cases, will be cleared after any debt charged at the promotional rate.

• Poor Credit History or difficult circumstances

It can be difficult to get a credit card if you've no previous credit history, have CCJs, arrears or defaults, have changed addresses frequently or are self-employed. There are card issuers who can help in these circumstances, although the rate you're offered is likely to be based on an assessment of your circumstances and as such may be different than the typical rate quoted. The plus point is this type of card, when it's used and maintained properly, can help to build or rebuild your credit rating.

• Special Uses

Withdrawing cash
Withdrawing cash on credit cards is never recommended as you'll generally be stung by high interest charges and added fees. It's well worth knowing the pro's and cons before you start, and familiarising yourself with the terms of your card is a must for anyone considering drawing cash off their credit card. You'll generally be charged from the date of the transaction so there's no interest-free period. If this isn't bad enough, you'll also be hit by a set fee or percentage of the amount withdrawn just for using the facility. Occasionally card issuers do offer promotional rates on cash advances, sometimes as low as 0%, although consideration should also be paid to cash advance fees and conditions.

Use abroad - know before you go
If one of your most important travelling companions is your credit card then you need to assess just how much it's costing you to use it overseas. You'd probably be surprised at the way your bill is bumped up when you make foreign transactions or cash withdrawals, as credit cards have extra charges when used abroad. Credit card exchange rates are based on the Visa and MasterCard wholesale rates, with a loading percentage usually added by the card issuers. This can vary from 0% to 2.75% depending on the credit card. The actual rate applied may vary between EU and non-EU countries so it's well worth checking this out before you travel. The loading will be applied to withdrawals made at foreign ATMs as well as when your card is used to pay for goods and services. As it's an exchange rate it's in addition to the set fees in place for withdrawing cash, and of course you'll pay interest at the standard or introductory rate (if not 0%) for both cash withdrawals and purchases. When selecting a credit card for use abroad it's also worth paying some consideration to the other facilities on offer, such as the provision of a replacement card in the event of the loss or theft of your own. Extra benefits may include an international assistance package and insurance for flight delay, lost and delayed luggage and personal injury.

Added benefits
Many card issuers reward their cardholders with a range of useful benefits, and these can prove to be a valuable asset to any household. Examples include domestic warranty cover that'll protect your electrical purchases for up to a year after the manufacturer's warranty expires, price promise cover that ensures you'll be refunded the difference should you purchase an item and then find it cheaper elsewhere (including in the January sales), and free purchase protection insurance to cover your purchases against loss, theft or accidental damage for a specified period.

Donations to charity
Charity cards cover a whole range of good causes and are issued in partnership with the charities themselves. Usually a one-off amount is donated when you first open the account or use your card and in many cases an ongoing donation is made by the card issuer, usually based on a percentage of your spend - all at no extra cost to you. There's plenty of choice, no matter where your interest lies.

• Other

Price-for-risk
Some card issuers use a price-for-risk strategy to determine the rate of interest you'll pay. In basic terms this means an assessment of your personal circumstances and credit history will be conducted and from this you'll be offered one of a number of rates. The rate you are offered may be different than the typical rate quoted but this type of pricing often means the card issuer can accept more people for more cards.

Down-selling
Many credit card issuers are able to offer credit cards to more people through the practice of "down-selling". By down-selling their products card issuers can offer an applicant an alternative product when they fail to qualify for the product they applied for. One of the reasons for down-selling is an applicant's failure to qualify on annual income, for example a person who has applied for a platinum card may not meet the minimum income requirement and as a result will be offered a classic or gold card. This practice is different from pricing-for-risk and the two should not be confused.

Allocation of payments
Unless you clear your balance in full each month it's worth paying some attention to the small print surrounding the allocation of payments, otherwise known as the payment hierarchy. Manipulating the payment hierarchy is one of the sneakier methods of clawing back interest currently used by card issuers. It explains how the repayments you make will be used to clear your outstanding balance, and unfortunately it is never as simple as oldest item first. Often balances at promotional rates are cleared before balances at the standard rates, which sees your outstanding balance accumulating interest at a higher rate for a longer period. For example, your transferred balance at 0% p.a. would be cleared before your new spend at 15.9% APR, which could leave you feeling the pinch. Depending on how you use your card, or intend to use it, the payment hierarchy may carry as much weight as the interest rates on offer so bear in mind that disregarding it could end up costing you dear.

Summary or "Honesty" box
From March 2004 all credit card issuers will be obliged to summarise their key product features such as interest charges and fees in an easy-to-understand format, known as a summary or "honesty" box. This will appear in all credit card marketing information, making it easier for consumers to compare deals and assess the implications of opening an account. As part of this overhaul each credit card company will be required to calculate annual interest rates on credit cards using one agreed method rather than one of the two methods used at present.

Step 3 - What if things go wrong?
If you are unable to meet your monthly repayments and are struggling to repay your outstanding balance, you should immediately contact your credit card issuer. The earlier you approach them, the more sympathetic they will be to your situation. Alternatively, consider switching your card to one with lower rates and fees before you become too bogged down with your repayments but beware - if you leave it until it's too late you may find getting accepted by a new company is a hurdle you may not be able to clear.

If you are refused a credit card and wish to make enquiries concerning your own credit file you can apply to the credit reference agency for your record. Credit reference agencies provide a detailed analysis of your own financial position. In particular your past repayment history, any County Court Judgements or defaults registered against you, electoral roll details and previous credit searches made.



Equifax PLC
You can view your credit file with Equifax for only £8.25. They also offer easy to use online facilities to dispute errors in your credit file instantly. To find out more click here.



Post:

Credit File Advice Centre
PO Box 1140
Bradford
BD1 5US

Experian Ltd
You can monitor your credit information online with CreditExpert from Experian. Click here to sign up for your free 30-day trial of CreditExpert.



Post:

Consumer Service Help Centre
Experian Ltd
PO BOX 8000
Nottingham
NG1 5GX

Free advice is available from your local Citizen's Advice Bureau, the National Debtline on 0808 808 4000 or the Consumer Credit Counselling Service (CCCS) on 0800 138 1111.