There is a lot of confusion around credit cards and there a lot of questions around a few key terms.
Credit cards provide the perfect way to manage existing debt and to help better organize your cash flow.
Effectively, a credit card is a short-term loan allowing you to make purchases and pay for them later. With most credit cards, you don’t even need to pay any interest on purchases, provided that you pay the debt off within one or two months.
What is APR?
APR stands for annual percentage rate. This is the most important statistic provided with any credit card. The APR is the most common way to calculate the cost of using a credit card, assuming that you don’t pay off debts in full each time you receive your monthly bill.
Generally, a lower APR means lower bills, but this is not always the case. APR actually takes into account any other charges as well as interest rates themselves.
Quoted APRs typically refer to the interest rates on purchases, although many credit cards charge different interest rates for different transaction types.
What are balance transfer credit cards?
You might not think of a credit card as a way to deal with debt, but a balance transfer card is actually the perfect solution to deal with larger debts.
Having debts on current account overdrafts or regular credit cards can cost you a lot of money in interest, but a balance transfer credit card provides you with interest-free transfers.
This allows you to transfer existing debts from one or more sources and avoid paying interest for a certain period of time. In some cases, this can be as much as 30 months. A one-time transfer fee will apply.
Our credit card calculator can help you work out how much your debt is currently costing you and how long it will take you to pay back if you don’t transfer it.
If the transfer fee will cost you more than you’re already paying in interest then you are better sticking the course and paying off your current credit card.
What are minimum repayments?
Every credit card has a minimum repayment. In order to avoid having any additional charges applied to your account or damaging your credit rating and history, you will need to make this minimum repayment every time you receive a bill.
Minimum repayments are normally very small, and paying nothing more than the minimum amount every month is generally a very bad idea. If you do this, it can take months or even years to pay off even the smallest amounts, during which time you will have to pay a lot in interest.
What are credit limits?
Every credit card comes with a limit to how much money you can spend on it. These limits can be extremely generous, particularly for those with good credit scores.
Many experts in the finance industry have even berated the credit card companies for providing such generous limits, deeming them irresponsible for doing so.
Credit limits are calculated based on your credit history and credit score. The better your credit history is, the higher the limit will be. Those with poor credit scores will be stuck with far lower limits.
Why is your credit score important?
For the reasons mentioned previously, your credit score plays a major role in the options available to you. The better your credit history and score, the more money you will be able to borrow and the easier it will be for you to apply for a credit card.
Credit ratings also have the same effect on any other loans, such as mortgages, personal loans and overdrafts. Maintaining a good credit score is absolutely crucial for protecting your financial future and widening your borrowing options.
Not paying your bills is the most common way to adversely affect your score.
How much does it cost to have a credit card?
A typical credit card costs absolutely nothing to use, provided that you pay off your bill in full every month. Many credit cards even give you interest-free purchases or balance transfers for much longer.
A few credit cards cost a monthly fee to use, but these usually come with some extra features to compensate. Balance transfer credit cards also charge a one-off fee which is a percentage of the amount transferred.
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