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Last Updated: Tuesday, 22 November 2005, 15:15 GMT
Using credit cards wisely
Credit cards can be an expensive way to borrow if you use them to take out cash or leave a balance outstanding month after month.

Typically, interest charged on outstanding amounts on store cards can be very high, so you should try never to leave an outstanding balance on a store card.

Interest charged on credit card balances can be nearly as high, so you might do better finding a personal loan through your bank or elsewhere, at a cheaper interest rate.

Shop around for the best deal, taking into account the length of time you will need to pay back the loan.

Check the APR, extra charges and terms and conditions so you can be sure you choose the cheapest loan you can.

Credit cards and store cards can, however, be extremely useful; they allow you to buy goods and give you up to 59 days to pay for them, depending on the card and the timing of your purchase.

That is potentially 59 days during which your money could continue to earn interest in your bank or savings account.

THE COST OF MAKING MINIMUM PAYMENTS

But, unless you pay off your credit and store cards in full every month, you lose that benefit. Instead, your debt to the credit card company starts to increase.

This is because interest is added to the amount you owe every month so your debt is paid off at a much slower rate than you might expect.

If you only pay off the minimum each month, your debt will end up costing you much more than you originally borrowed and will take a long time to pay off completely.

So if you cannot manage to pay off the whole amount every month, do pay as much as you possibly can.

Look at this example which assumes that you buy no further items using this credit card, and that the interest rate does not vary. (This example is for illustrative purposes only as lenders vary slightly in the way they do these calculations.)

  • The outstanding balance (the amount you owe) on your credit card is 1000 and the interest rate (APR) is 25.9% a year.
  • You only pay the minimum each month (in this example, 3% or 5, whichever is the greater), so in the first month you pay 3% of 1000 = 30.
  • The 30 is then deducted from your next month's bill, but interest calculated on a daily basis would be added on - just under 20. So the debt is only reduced by around 10.
  • Believe it or not, it would actually take you around 18 years to pay off the whole balance and the total payments would amount to around 2,500 which is 1,500 more than you first borrowed!
SPECIAL DEALS AND 0% OFFERS

There are a lot of credit cards that offer special deals, and even 0% interest charges to new users for a period of time.

Before taking up one of these, check the terms and conditions carefully.

  • Does the special deal apply only to balances you transfer from other credit cards (balance transfers) or does it also apply to purchases using your new card?
  • What interest rate will be charged after the offer period ends?
  • Is there a fee for transferring balances from other cards, and if so, how much is it?
If the offer is for balance transfers only, then any monthly payments you make will usually go towards paying off the balance transfer first, and you will still have to pay off new purchases at whatever APR the card issuer charges for those.

If you have an offer of 0% interest charged on balance transfers and new purchases for a limited period, do remember to make a big note in your diary of when the special offer period ends.

Because you will then start incurring interest unless you pay off the full amount every month.

It might be possible to move any remaining balance to another card offering a 0% deal, but do this too often and you might find that credit card companies start to refuse to let you take out another card.

When the offer does run out, try to pay off the full amount or maximum you can afford every month.

LATE PAYMENT CHARGES AND EXCEEDING YOUR LIMIT

You will increase your debt if you are late in paying a monthly instalment.

Even with a relatively small outstanding amount, if you are late paying, or miss a payment completely, you may be charged, usually about 20 to 25, and that is added to the amount you owe.

And if your borrowing increases so much that you go over your credit limit, you will be charged a similar amount for that too.

However, you can avoid late or missed payment charges altogether.

Did you know that with most credit cards you can set up a direct debit to pay your credit card bill automatically every month?

You can set it up so that you pay either the minimum payment or, in some cases, the full amount. If you do that, you need never incur late payment charges.

EXTRA LEGAL PROTECTION

It is worth knowing that using a credit card for purchases worth between 100 and 30,000 does give you extra legal protection.

If your supplier does not fulfil his contract with you in some way, or the goods are faulty, your card issuer has joint liability with the supplier of the goods, and you can therefore seek compensation from the card issuer if you get no joy from the supplier.

Note that this protection does not cover charge cards or credit card cheques.

CREDIT CARD CHEQUES

Some credit card companies send out blank cheques for you to use, mainly in situations where you would like to use credit to pay, but the supplier does not take credit cards.

Credit card cheques are used in the same way as normal bank cheques, but any money you spend using them is added to the amount you owe on your credit card rather than coming out of your current account.

This means you will pay interest on it, usually from the day the cheques are used.

In addition, you may be charged a handling fee by the credit card issuer (usually a minimum of 2 or 1 or 2%).

Not only can credit card cheques be costly in interest and charges, they do not offer the same legal protection that credit cards themselves offer.

DRAWING CASH ON CREDIT CARDS

Drawing cash on credit cards has similar drawbacks to credit card cheques.

You may be charged a handling fee and incur interest charges from the moment you draw the cash.

So do look at the terms and conditions for your card.

SUMMING UP
  • Use credit cards wisely - pay the amount you owe in full, if you possibly can, every month. Otherwise, pay as much as you can and avoid paying the minimum.
  • Ideally, be sure you know how you will repay your credit card bill before you buy things with it.
  • Make the most of special deals, but remember to have a plan of action for when the deal runs out.
  • Don't incur late payment fees - set up a direct debit if you can.
For further information about the differences between credit, debit, store and charge cards, see these links:

Best-buy tables for credit cards are widely available on the internet.





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