A credit card could be compared to a nail gun; it's a very useful piece of equipment, but it's potentially dangerous if not used properly.
When you choose a power tool, you consider a number of things including what tasks you want it to do for you; we recommend you do the same when considering signing up for a credit card.
Here are four things to consider before you choose a credit card:
1. How do you intend to use your card?
Are you the kind of person who will pay off your outstanding balance every month religiously? Do you have a balance each month and just make regular minimum payments? Is the card just for those unforeseen emergencies?
If you're going to clear your balance every month, then the interest rate is likely to be of little concern to you. So look for a package with no annual fee and the longest period before you have to make a payment.
If you're going to carry a balance, the interest rate will be of high importance to you along with how the supplier will calculate the minimum payment each month.
Unforeseen emergencies; look for a card with no frills and no annual charges.
2. The interest rate
'Which online' says "Unfortunately you can't choose a credit card just by comparing interest rates.
Credit card issuers now use 14 different methods of charging interest. If you pay your bill in full, this usually won't affect you. But if you take cash out of a cash machine with your credit card, or pay anything less than the full amount on your statement, you'll normally be charged interest.
In fact, if you had two cards with the same interest rate and used them in exactly the same way, one could end up costing over twice as much as the other just because it calculated your interest differently.
This is because the amount you are charged depends not just on the card's rate but on when it starts and stops charging interest"
It is now increasingly common for banks and lending institutions to decide your interest rate based on risk based lending.
Essentially banks use your credit report to set the interest rate on your card, so if your credit report is poor then you are likely to be charged a higher interest rate than someone with a low credit score.
APR's
This is the annual percentage rate, known as the APR, whereas the effective annual rate is known as the EAR.
Bear this in mind while comparing credit cards by APR and EAR; these acronyms place the emphasis on a yearly or annual calculation of interest. This does not mean that the interest is totted up at the end of every year. Instead most card issuers will compound interest on a monthly basis.
In theory, cards with lower APRs should be cheaper, however in practice there are a number of problems with APRs on credit cards.
3. The amount you can spend
This is your credit limit. Lenders take a risk based approach to deciding on your credit history, so depending on your credit score it could be as little as 250 to an unlimited amount.
Keep in mind that should you go over your limit you will be charged additional fees, and you will affect your credit score.
4. Fees and penalties
In July 2006 most credit card companies were forced to cut these charges from 20 or 25 to around 12 by the Office of Fair Trading.
Common charges include fees for transactions, such as balance transfers and cash advances, or for asking to increase your credit limit. There also are penalty charges for paying your bill late or going over your credit limit.
We hope you have found this article useful.
The ethical debt solutions company:
At National Money Helpline we recognise that every person's situation is different and we are positive that, whatever your problem, whether that be a money problem, Debt Management question or just a question to help you with your financial situation, we can find Debt Solutions that are absolutely right for you.
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