Credit cards are a necessity for most of us. It’s a lucky person whose monthly wage can stretch to those big purchases like holidays, new items of furniture and car repairs!
It doesn’t mean credit cards are easy to understand, though. With so many different types, and so many different offers that can come alongside them, it can seem like a minefield.
Here we’ll give you some quick tips to get all the different credit card types explained once and for all. You’ll never need to feel flummoxed staring at your statement or over the counter at your bank again!
- What are interest rates?
- Balance transfers explained
- What is cashback?
- Interest free periods on purchases
- What are travel miles?
- Credit rebuilder cards
- When to consider a credit card
To put it simply, interest is the amount you pay on top of an existing debt (or, if the shoe is on the other foot, the amount you’ll receive yourself on money you have saved in a bank account). It is the amount you pay for the privilege of being able to borrow money.
For credit cards, you’ll pay a certain amount of interest on whatever you’ve borrowed and are still to pay back. The more you’ve borrowed, the more interest you’ll pay. Credit cards all have different interest rates, so make sure yours is as low as possible.
A balance transfer is when you transfer the balance of one credit card onto another. It’s important to know that this won’t reduce the overall amount you pay, but that it could see you pay a lower amount of interest. This is the main reason people make balance transfers. If you’re paying a lot of interest on your existing debt, a balance transfer might be a good idea.Make sure you look for 0% balance transfer deals, which are available as an incentive with lots of credit card providers.
Cashback is the money you receive back when you make purchases with your credit card. Cashback programmes are usually used as incentives to get people to sign up to specific credit cards. For example, you might get £1 back for every £100 that you spend – making a scheme sound tempting if you’re going to be making a lot of purchases on credit.
Be careful, though – if you don’t need to spend on your credit card, cashback could tempt you to do so anyway. If you can buy things without using your credit card you should – the money you recieve back is unlikely to be worth the interest that you pay in the long term.
Interest free periods do exactly what they suggest – they allow you to spend money and make purchases on your credit card without paying interest. Remember that this interest free period won’t last forever, though – you will start paying at some point. However, if you can get your credit card paid off before you start paying interest you’re on to a winner! Most interest free periods last just under two months.
Another incentive that you might see when you’re looking for a good credit card deal is air miles, aka travel miles. These incentives work in a relatively simple way: the credit card provider (usually a bank) will partner with an airline to offer air miles for customers the more they spend on their credit card.
Of course, this incentive is only worth it if you’re going to use your miles – so don’t get sucked in if you prefer taking your holidays in the UK!
Credit rebuilder cards can be a great idea if you’re looking to rebuild a bad credit score. If you’ve had debt that you’ve struggled to pay off in the past, or if you’ve struggled in other ways financially, you might have trouble getting accepted for a regular credit card.
This is where a rebuilder credit card comes in. Often easier to get accepted for than regular cards, they’re designed exactly for the situations described above. They might charge a higher rate of interest than regular cards, so make sure you check this before you sign up.
The basic rule here is to only consider a credit card if you know you’ll be able to afford to pay it off. If you have no regular income or you know you won’t be able to make the minimum monthly repayments, making a purchase on credit could be a very bad idea.
Ask yourself these questions:
- What do I need a credit card for? Is it a one-off purchase (a bed, a new car, etc) that I really can’t live without?
- How much does it cost – i.e, how much debt wilI I need to put onto my credit card?
- What will my minimum repayments be?
- Will I reasonably be able to pay off the minimum balance every month?
Once you’ve answered these questions you’ll be in a good position to take out a credit card, and know exactly how you’ll pay it off. Remember, knowledge – especially when it comes to finance and borrowing – is power!