Credit cards can be made to work in your favour but you need to choose the right card for your needs.
The borrower must also be very disciplined in using their card and only pay for planned purchases to avoid landing themselves in debt they cannot clear.
Credit cards can be an expensive way of borrowing money and, unless you can clear the balance at the end of each month, the debt can soon mount up leaving the borrower in a worse position than they were in the beginning.
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So here is a simple guide to choosing and using your credit card wisely.
Check the APR to get a true reflection of the interest rate
The APR, or Annual Percentage Rate, gives an indication of the actual percentage costs accrued over a year, including any extra charges attracted by the card.
So if the published interest rate looks cheaper than other cards on the market, but there are a number of extra charges that apply, then the APR may amount to more than on cards advertising a more expensive interest rate.
Always ensure you are aware of the true cost of using your particular card.
This comes with a warning, however, that applies to the advertised APR in the UK. The British Consumer Credit Council introduced regulation in 2011 which constrained credit providers to advertise their Representative APR.
Representative APR, intended to stop unscrupulous companies promoting an APR that only applies to a very small percentage of clients, allows credit card suppliers to advertise the APR that they would offer to at least 51% of people that applied for their card.
The negative side of this legislation then becomes obvious – up to 49% of borrowers may not benefit from the advertised APR.
There are a number of reasons why clients may be rejected for a card, or have a more unfavorable interest rate, mostly connected with a low earning potential or poor credit history.
However, if you fall into this bracket then you are likely to have a similar problem with any of the credit card providers. The APR therefore remains a good way to compare credit cards, but be aware the rate you receive might not necessarily be the rate that is advertised.
Once you have compared the APR of different providers and know which credit card company you would prefer to do business with, then you need to decide which type of card is best for you, taking into account your spending habits and how you plan to use the card.
There are two types of card on the market nowadays and the type to choose depends on how quickly you can clear the balance.
These cards will pay back a percentage of each purchase you make on the card.
The percentage of cashback varies between cards but is usually between 3% – 5%. While this sounds like a great idea, the scheme will only work in your favor if you pay the balance off every month.
If you leave an amount on the card to roll over each month then the interest will soon outstrip the cashback portion and the benefit of the card disappears.
If you don’t, or can’t, plan on paying the balance off each month then you are better off looking at credit cards that have 0% interest for the initial term.
Cards with 0% interest
These cards are offered on the basis of no interest payments for the beginning period of the account. This period can be as long as 3 years with providers that offer the longest 0% interest terms.
This is the best option if you intend to make a purchase that will take some months to pay off. However, it is of the utmost importance to budget with this type of card.
Don’t make any unplanned purchases and make sure you know how much you intend to repay each month. Whatever you buy on these cards, ensure you go for the cheapest option at all times and definitely clear the balance before the end of the 0% interest period, then don’t use the account again as the card will revert to an ordinary level of interest.
As with all forms of credit, don’t try and borrow your way out of debt. Clear all your existing debts before applying for a credit card otherwise the temptation to use the card to supplement your income can be too overwhelming and you will find yourself even deeper in debt.
Besides this, the application for a credit card has an impact on your credit score and an already depressed score could be tipped into a dangerous position by the acquisition of the card.
As with all forms of credit, credit cards will only work for you if they are used wisely. The golden rule is to only use your credit card for items you have planned to buy on credit and that you have budgeted for.
Don’t make the mistake of thinking you can buy the most expensive goods and pay for them over an extended period of time because this can lead to an inability to clear the balance on the card.
Always go for the cheapest option and use the card in the same way as you would a personal loan. Using your credit card to bolster finances that are too short to meet your needs each month is a sure route to spiraling debts and financial disaster.
Use your credit card wisely and it can provide you with flexible cash when, and where, you need it. Use it unwisely and your financial difficulties may only get worse.
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