Credit cards can be a low or zero cost way of borrowing if you use them correctly – but get it wrong and you could find your debts spiraling out of control.
Keep your pin safe
• Do not store your PIN with your card, or give it to anyone else. If you do this, and someone takes the card and uses it, the bank will not pay you the amount stolen. In most cases they will pay you back if it wasn’t your fault.
• Replace your PIN with something you can remember. You can do this on most cache machines. Choose a number that you can remember, but not something others can guess, such as your date of birth.
Check your bill
• Make sure all payments listed on your credit card statement are for things you buy, and ask about anything you don’t recognize.
• If you receive your statement online, it may be a good idea to check it on the same date every month – a week before payment is due. This is so that you get used to making sure that everything is in order and that you pay off your cards on time.
Make a plan to pay in full every month
It’s a good idea to plan on paying off your credit card balance in full each month. This means that you will not be charged interest.
If you do not clear your balance completely, you will usually be charged interest on your outstanding balance. This will exclude anything that falls within the range of the promotional rate.
For example, if you raised a credit card bill of £100 during the month and paid £90 at the end, you could be charged interest on £10.
Avoid the late payment trap
If you do not pay your bills on time, it can lead to some serious consequences:
• Fees and Charges: You will be charged a late payment fee (which can be as high as £12), as well as interest on the full amount you pay.
• Increased interest rates: If you frequently make late payments, your card issuer may raise your rate, lower your credit limit, or cancel your card.
• Problems in getting other credit: Making late payments can damage your credit rating. This makes it harder to get other credit, mortgages, other cards, and even phone contracts.
But there are ways to avoid paying late:
• Payment by Direct Debit: The best way to avoid the late payment trap is to have the money automatically deducted from your bank account. Ideally, set up a direct debit to pay the full amount every month.
• Pay manually if your income varies from month to month or you are concerned that there is not enough money in your account to cover the direct debit.
• Pay overtime: Although you can pay your credit card bill over the phone or online with your bank on the same day, it may take a few days for your payment to be processed. So avoid leaving it till the last minute.
Avoid the Minimum Payment Trap
The minimum amount required to be paid on your card each month is often quite low. But paying only this amount will cost you a lot in the long run.
You can repay over the years and pay more in interest than the original loan.
Let’s take the example of a £1,000 loan on a credit card with a 16.9% APR.
The minimum repayment for this card is 2% of the balance, or £5 – whichever is higher.
The first payment will be £20, but this figure will drop when you pay off the balance.
The table shows how much you could save if you repay the same amount every month on a £1,000 balance.
|Monthly repayment||Time you take to repay||Interest you pay||Total you’ll pay back|
|Minimum (2% of balance)||22 years, 11 months|
|£20||6 years, 10 months|
|£50||2 years, 8 months|
Remember, if you don’t pay the bill in full, you’re likely to be charged interest on everything on the card. This will include the new things you bought that month.
So, if you continue to spend on that card, you’ll end up paying even more.
If you believe your payments are getting out of control, or you have been contacted by your card issuer, there is help available.
Credit card providers should contact and encourage those who have made very little or no minimum payments on their credit cards in the past 18 months. This is where you have paid in excess of the interest, fees and charges you paid to pay off your balance.
Lenders are required to suggest high affordable repayments. If you do not respond, or ignore the problem, and the situation persists for more than 36 months – your account may be suspended.
Keep within your credit limit
Don’t go over your limit. If you do, you will be charged – usually up to £12.
It will also affect your credit rating.
Increase your credit limit
If you feel you need to use your card more, contact the card issuer to request an increased credit limit.
But do so only if you’re sure you can comfortably pay the higher amount – and won’t be tempted to spend more and end up with more money.
Your card provider may offer you an increase in your limit but you can decline it
Avoid cash withdrawals or credit card checks
Credit cards are not like debit cards – you can’t withdraw cash for free.
You may have to pay a fee and you are likely to be charged a higher interest rate than for purchases on your card. This is even if you pay off your card in full at the end of the month. This is because there is no ‘interest-free’ period unlike purchases.
Some other transactions may also be treated like cash withdrawals, and attract similar interest rates and charges. for example:
• Buying gift cards
• Buying Postal Orders
• Gambling Transactions
• Competition Entry Fee
• Buying Forex
• Paying for something with a credit card check (avoid using them always).
Avoid making frequent payments on your credit card
A recurring payment lets a company automatically charge your credit card bill. This is also sometimes referred to as a ‘continuous payment authorization’ (CPA).
But it is not as secure as direct debit from bank account.
To cancel a recurring payment, contact your card issuer and let them know that you have withdrawn your permission to the company to collect payments.
If payment is made after that, the card issuer will have to refund this amount to you along with any associated charges.
But you must let them know after the end of the last working day before your bill becomes due.
It’s best to avoid recurring payments because of the risk of how much money is running out of your credit card account, and you could accidentally exceed your credit limit, which could lead to charges.
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