Credit cards explained

A credit card allows you to borrow money from a card provider to pay for goods and services, creating a debt until you pay it off. Each month, you receive a bill for your spending. Paying the full balance by the due date helps you avoid interest charges. However, some transactions, such as cash advances, incur interest charges immediately and may also be subject to a fee, regardless of whether you pay off the balance in full.

The credit card process:

1. You make a purchase with your credit card.
2. Your Statement (bill) arrives.
3. Always make at least the minimum repayment (detailed on your statement) but aim to pay the full amount if possible. Ensure the payment is made by the date on the statement.

If you don't pay the balance in full, interest charges will apply according to your agreement. Some lenders calculate interest on the entire amount spent, while others charge only on the remaining balance. The longer it takes to clear your balance, the more interest you will pay. By understanding this process, you can manage your credit card effectively and reduce costs.      

For flexibility or smaller purchases over time, credit cards could be the right choice allowing you to borrow and repay conveniently. In the following section, you’ll find an explanation of key terms to help you better understand how credit cards work:

Credit Limit: Your credit card lets you spend up to a certain amount, known as your credit limit. This limit is based on factors like your credit history and income.

Monthly Statement: Each month, you'll receive a statement showing:

• Balance: The total amount you owe on your account at the date of the statement.
• Minimum Payment: The smallest amount you must pay.
• Payment Due Date: The latest date your payment needs to be received by the issuer.
• Transaction details: Any activity on the card – purchases, cash withdrawals, fees, interest charges. However, due to processing times, some transactions may not appear until the next statement.

Interest rate: this is the percentage charged on the amount borrowed. The Annual Percentage Rate (APR) shows you the cost of using a credit card over a year, including all fees and charges. This helps you understand what your borrowing will cost. Lenders must display the APR in adverts and summary boxes, making it easier for you to compare different credit card offers.

It is important to remember that using a credit card involves costs. Keep this in mind to ensure you're aware of the financial implications of your credit card spending. To avoid high interest charges, aim to pay your bill in full by the due date. As interest rates vary by lender, it's important to compare options. Pay attention to interest calculations—some lenders charge on the full bill, while others only on the remaining balance. 

Interest rates differ between card types and lenders, so it's important to compare options to find the best deal for you. Credit card providers typically offer a 'Summary Box' that explains the credit card process and calculations, including examples of potential charges based on various spending and repayment scenarios.

This is to provide you the information you require to help you to understand the real cost of using a credit card, helping you make the correct decision for you.

Interest Free period: Typically, credit cards offer a standard interest-free period ranging from 45 to 56 days, but this depends on the issuer and the card type. Some credit cards might offer promotional interest-free periods that exceed 56 days, however, these extended periods are usually temporary and revert to the standard interest-free period after the promotional phase ends.

Cash Advance Fee: Unlike regular purchases, interest on cash advances normally begins accruing immediately, often at a higher rate. Additionally, a cash advance fee is typically charged, which is a percentage of the amount withdrawn. Credit card providers offer a 'Summary Box' detailing transaction costs, including cash advances; review it carefully to understand the cost.

Foreign Transaction Fee: Making transactions abroad can also incur extra charges, often referred to as foreign transaction fees. These charges typically apply to purchases made in a foreign currency and can be a percentage of the transaction amount. Always check to understand how international transactions are processed and charged. Credit card providers will offer a 'Summary Box' that explain the cost of these transactions.

Being late with credit card payments can have several consequences. They can negatively impact your credit history by recording a late payment against your name. This can affect your credit score and future borrowing ability. Additionally, you may be charged a late payment fee, this fee is determined by your credit card provider and normally ranges from £8-£12.

Missing a payment on your credit card can lead to increased costs due to additional interest charges. This not only raises your overall balance but can also result in the removal of promotional offers, such as a 0% balance transfer rate, making your borrowing more expensive. Additionally, missing payments can negatively affect your credit score, impacting future borrowing opportunities.

To avoid these issues, pay your credit card bill on time and spend responsibly. Setting up reminders or automatic payments, such as a direct debit, can help ensure your payment is not missed and is made on time.

Section 75 Protection: Purchases between £100 and £30,000 may be protected under Section 75 of the Consumer Credit Act, offering added security.

Important Considerations:
Before signing any credit agreements, conduct thorough research to understand terms and conditions. This helps you choose the best option for your financial needs.