Credit cards explained

When you use a credit card, it's classed as a form of borrowing. Basically you're spending someone else's money, not your own. It's important to understand that when you buy something on a credit card there's a bit of time before the actual bill arrives,  but when it does and if you don't pay the bill off in full, you'll start to incur credit card interest charges. Here's a typical cycle of what happens:

You make a purchase using your card

You wait for the bill to come in

Then (and assuming you can) you pay it off in full by the date shown on your most recent statement

If you don't pay it off in full the penalty will come in the form of an interest charge, which is calculated (as per the terms of your agreement) and added to your bill. Some lenders will charge you interest of the entire amount you originally spent, others will charge you interest on just the amount outstanding (what you couldn't afford to clear when your last bill came in.) So the longer it takes you to clear your balance in full, the more the interest you will have to pay back. 

Credit cards are different from other lending products like loans and mortgages, because you can borrow and repay whenever it suits you. There are many advantages to paying by credit card, particularly if you take advantage of up to 56 days interest free credit, meaning you get to hang on to your own money for longer (by spending someone else's!). Another advantage of using a credit card is that, in many instances and subject to conditions, some of your purchases may be protected too. Section 75 of the Consumer Credit Act states that 'credit cards must provide protection for a purchase above £100 and below £30,000'. We can't guarantee that you'll win your case, but this section of the Consumer Credit Act is certainly designed to help you, the consumer.

Now the flip side: the harsh reality is that if you aren't able to pay off your bill in full and by the due date shown on your statement, you really can get stung with high interest charges. Every lender will apply a different interest rate to their range of credit cards, so not only is it wise to shop around for the best deal, it's also important to look at how they calculate interest and on what outstanding balance. Like we said before, some lenders will calculate interest charges on the entire bill (even if you paid half of it, for example), whereas other will calculate interest on the amount you didn't clear. 

Do your homework before you sign on any dotted line...

This is the actual rate at which interest is charged, expressed as a percentage of the amount borrowed.

The Annual Percentage Rate shows you how much you will be charged in a typical year when you borrow money through a credit card. It includes all fees and other charges, as well as just interest, so it gives you a real sense of how much your borrowing will cost you. Lenders are required to state the APR in their advertisements, allowing you to compare rates.

APR and interest calculations may seem like 'bank jargon' that is both confusing and unfriendly, so use it as a constant reminder that whenever you spend on a credit card, it's rarely free.

Interest rates can vary between the different card types and the variety of lenders, so shop around for the best possible deal, dependent on your spending objectives.

Most credit card providers will produce a 'Summary Box' which makes the credit process and calculations as transparent as possible for you. They usually give an illustration by showing what you might be charged if you spend a certain amount and pay it back of a certain length of time. This level of transparency is great because it allows you to understand the real cost to you, as a consumer.

It's not ideal to be late with one of your credit card payments, to be honest. Not only does this impact on your credit history by registering a late payment against your name (usually if you are more than 30 days late), it's also likely that you'll incur a one-off late payment fee, which generally starts at around £8.00. Some lenders may be lenient and waive this fee (particularly if your lateness is out of character), others may charge this and add the fee to your account, which is then repayable on your next statement. Also remember that if you are late with your bill, you'll incur interest charges too, because you'll have missed your payment on the date it was due. All in all, it's a costly mistake to make.

If you've taken advantage of a credit card promotion, like a 0% balance transfer, for example, you may also put yourself at risk of losing that particular promotion, depending on the terms of it. So if you're enjoying a 0% interest rate offer and you miss a payment, you might just find yourself shopping around for a new promotion too.  So try to pay on time, every time and always spend responsibly.