Introduction to Credit Cards

Credit cards are a blessing and a curse. They are a frighteningly convenient way to pay for almost everything you buy. That is not a problem if you pay off the outstanding balance every month.

The trouble is that the monthly statement tells you that you only have to pay off a tiny amount each month. If you are well inside your credit limit the amount they ask for is just a token - sometimes less than 1 % of the outstanding balance. Like the drug dealers, they are trying to get you hooked. Before you are tempted to pay only the minimum, it is important to realise what a high rate of interest you are paying for this very easy form of credit. The problem is the confusion, often deliberately created by the banks issuing the credit cards, around the interest rates they charge. The Chief Executive of Barclays recently admitted to a Select Committee of the House of Commons that he would advise his children not to run up debt on a credit card - it was much too expensive a way to borrow. Take the advice of someone who knows! A huge variety of cards are very heavily advertised through the press and through direct mail, quoting different interest rates.

• Interest rate on credit balance transfers. The interest rate quoted by different companies ranges from 0% - yes really! - to 3 or 4% above base rate. But this low rate applies only to the debt you transfer from other credit cards, and then only for a limited period - six to nine months is the usual maximum. This is the bait on the hook.
• Interest rate on new purchases. This is the rate you will pay over the long term and is much higher than the other rate - often 10 or 14% above base rate. That means you will be paying a rate of interest between three and four times what you pay for your mortgage.
• Interest rate on cash withdrawals. Some card issuers charge a higher rate on the part of the balance arising from cash withdrawals. There is also a fee for cash withdrawals - usually 2% of the amount withdrawn.

So if you are tempted to pay the minimum when your credit card statement arrives, ask yourself:

• Do you really need to borrow using your credit card when most other forms of credit are cheaper?
• If you do - remember to shop around for the card with the best rate. It will be worth changing as there are big variations in the rates charged.
• You will get the first few months after you switch card at a 0% or low rate on the balance you transfer. If you have the time and energy you might get away with switching a couple of times a year. Eventually you will have to pay the standard rate. Make sure you end up with the card with the lowest rate for new purchases.

Other Points to Remember

• There is no need ever to pay an introductory or annual fee for a credit card.
• There are big penalty fees for not paying off the minimum monthly balance.
• If you are virtuous enough to pay off your balance in full every month, make sure you do it in plenty of time. Allow for postal delays. If you miss the date you could end up paying the penalty for missing the minimum payment as well as the interest on the balance. It is particularly easy to miss a payment when the statement comes in while you are away on holiday. The best plan is to go for a card which gives you the option to pay off the whole balance every month by direct debit from your bank account.
• If you use your credit card overseas, the rates of exchange used to calculate the sterling figure charged to your statement can vary. The card issuer may use a poor rate of exchange - or the rate may change between the day of purchase and the day the rate conversion is calculated. If you really need to know how much you are paying for something at the time you buy it, use cash or travellers' cheques.