Play your credit cards right
A recent interim report from the Financial Conduct Authority found most of us (65%) find credit cards fairly easy to understand, but around one in eight people admit they’re struggling.
But, digging below the surface shows that many consumers don’t understand cards as well as they think they do. Half of panellists in the FCA’s study didn’t know the annual percentage rate (APR) on their card, and a similar number of people who use their cards abroad have no idea what fees they pay to do so.
Some credit card users are less likely to understand their cards than most – particularly those who consistently have an outstanding balance, or are using a card that claims to help rebuild a credit rating.
That can lead to problems – customers who don’t know their credit limits run the risk of overspending, which can cost a small fortune if it means you get booted off a 0% balance transfer deal.
Only 59% of people can correctly answer the following true or false questions about 0% balance transfer cards according to the FCA. 22% got one question wrong, and 19% made two or more mistakes.
Can you do better?
1. True or false – 0% balance transfer cards can be used to transfer debt from an existing credit card to a new credit card.
2. True or false – Interest will never be charged on a debt transferred to a 0% deal.
3. True or false – A fee is typically charged to transfer the balance.
4. True or false – After the introductory period, interest is charged on the debt that is transferred and has not been paid off.
Answers: 1. True, 2. False (you could be charged interest if you don’t clear the balance in time, make a late payment, go over your credit limit), 3. True (You normally need to pay a fee of 2%-3% to switch to a 0% balance transfer deal, but a handful of cards offer fee-free deals), 4. True.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.