They’re so easy aren’t they: credit cards? It lands on your doormat, 85.60 x 53.98mm of pure spending power, emblazoned with your chosen design of a Capybara set against the inimitably imposing landscape of the Amazonian rainforest.
The reason you got the card? It’s got the largest rodent in the world on the front, what more reason do you need! Well, ok, but what is the rate for purchases? Balance transfers? Do you get any rewards for spending on it? Er…
Tut tut. If only you had read these tips before committing yourself …
The first thing you should do if you are considering taking out a credit card is to establish why and to be honest with yourself:
This little maxim is important when considering any financial undertaking, and is especially crucial when thinking about revolving credit. Hang on: revolving credit? Revolving credit is a type of borrowing where you can borrow up to an agreed limit, but without a set term to repay in. What’s more is that you can pay back money and then borrow it again without further approval. Examples of revolving credit include overdrafts and credit cards. The revolving bit? Well that relates to the now outdated practice of credit cards being marketed in a rotating display cabinet (much like those cake stands you see in a lot of cafes and bistros)!
The thing with revolving credit is you need to be disciplined with yourself. Have you previously used up the credit limit on your overdraft or credit card? Have you been switching your balance between credit cards for years, paying a little off, then spending a little, never actually seeing the balance go down? All the tips in the world won’t change this if you can’t stick to a budget. Consider perhaps another type of borrowing such as a personal loan. Yes you may end up paying more in the short term, but at the end of the loan the money is repaid (if you do this cut up your cards afterwards so you remove the temptation to spend again).
What do you want from a credit card?
Take time to seriously think about what it is that you want from a credit card. You may want one so you can transfer the balance from another card, you might want to have one for an emergency, you might have a big purchase in mind (not a Capybara though – they are controlled animals. If you’re found with one it will be confiscated).
So, now you know whether you want a credit card and, if you do, what you want out of it. There are many different features, to meet many different needs:
Most credit cards will allow you to transfer a balance from another credit card, so obviously this feature is suited to those who have previous balances that are on higher rates of interest. Some providers will offer a 0% balance transfer deal for a set period in order to encourage you to transfer. You should use this opportunity to reduce as much of your debt as possible while you are only repaying the money you borrowed, and not any interest. Some other cards will offer a lifetime balance transfer rate which is usually lower than that charged for purchases. With cards offering enticing balance transfer deals there are three things you should be aware of:
Although the transfer rate might be good, the rate charged for purchases may not be as alluring. What’s more, things you buy may then join the back of the queue of debts to be repaid on the card: meaning that you will be paying the debt on a higher interest rate for as long as your transferred balance is outstanding.
Beware. A lot of cards will charge you a percentage of the balance you want to transfer (typically 3%). This shouldn’t put you off in itself; it will most likely work out cheaper than being on a higher interest rate over the term of the transfer deal, but still it’s best to check.
If the card has an introductory balance transfer rate, make sure you are ready to review your arrangements when you get to the end of this.
As with the balance transfer, some cards offer a 0% interest rate on purchases until you reach the end of an introductory period. This could be suitable if you wish to make a big purchase, and can repay it quickly during the introductory period. Bear in mind that at the end of the introductory period, the purchase rate on the card will shoot up for any balance you have remaining, as well as future transactions.
Reward/Donation/Affinity CardsIt’s nice to get something back isn’t it? It’s also nice to put something back. Well reward credit cards give you (yes you’ve guessed it) a reward for spending on your card such as points, cashback or vouchers. Similarly a donation/affinity card will give your cause a portion of any purchases you make in the form of a donation. These cards are suitable for those who like to use credit cards to manage their cashflow during the month, and then clear the balance in full at the end.
Standard/Gold/Platinum/Black cardsCredit cards can be status symbols in the same way as an expensive car or a pygmy Capybara. Back in the good old days you could get different, more exclusive cards based on how much you earned. In truth this still exists to some extent, although the boundaries have recently become blurred (with the exception of Black cards which remain only for members of the aristocracy). For the Top Trumps players amongst you Black cards are the most exclusive followed in order by Platinum, Gold and Standard cards. Don’t be bamboozled: the balance transfer and purchase rates remain king no matter what the type of card.
Credit cards will allow you to withdraw cash. The simple rule here is: don’t withdraw cash using your credit card! It attracts exorbitant fees and interest from the card provider. You should reserve taking out cash on your card only for emergencies. I had one instance a couple of years ago when travelling through Walthamstow. I chanced across an injured Capybara in the road. I took it to the vet who wouldn’t accept card payment, so I had to go to the nearest ATM. Unfortunately a blood transfusion for a Capybara is rather expensive (the programme in Peru to attract donors had met with little success as Capybaras are, by nature, quite selfish). Needless to say I’m still paying it off- definitely a mistake I won’t be making again…
You can normally use your credit card abroad. However, if you do there will usually be a foreign usage charge applied which could be as much as 3% and, if you take out cash as well (haven’t you read the tip above!), then there may well be further charges on top! Having said this, you get added protection from using your credit card over cash if you need to get a refund or replacement, and some providers even specialise in not charging foreign usage fees at all.
Now all you need to do is make sure you get the best credit card available in the market.