Credit Cards UK: Key questions and answers

What is a credit card?
It is simply a form of borrowing. The credit card issuer sets a maximum credit limit and you can spend as much as you like up to that limit provided you repay a minimum amount each month.

How does it differ from other plastic such as debit and charge cards?
A debit card is linked to your bank account. The cost of anything bought with this card, or any money withdrawn with it will be taken from your account almost immediately. It is effectively a plastic cheque.

With a charge card, you charge your purchases to the card. But when you receive your monthly statement you are required to repay the outstanding balance in full. You are not allowed to roll over the debt into the next month as you can with a credit card.

What charges do credit cards levy?
Interest is the main charge. You will be charged interest each month on the outstanding balance on your credit card account. Typically, this will be between 1% and 2% irrespective of underlying bank base rates. This is equivalent to an annual interest rate of between 12% and 24%.

Is interest charged from the day I make a purchase?
It depends. With most credit cards, provided you repay your bill in full each month, you will pay no interest. This means that you benefit from up to 56 days of interest-free credit from the day you make a purchase to the day payment is due. If you do not repay the debt you will be charged interest on new purchases either from the purchase date or the date the transaction is put through your account.

Some cards do not offer an interest-free period. This means that transactions attract interest charges immediately irrespective of whether you clear the balance. If you prefer to clear your debts each month these cards are not for you – you are better off with one that offers an interest-free period.

Do interest rates move up and down in line with the bank base rates?
In theory yes, but in practice no. Many credit card issuers are quick to push up their rates if bank base rates rise, but are reluctant to cut them when bank rates fall. Credit card interest rates seldom fall below double digits unless a credit card company offers special short-term teaser rates to tempt people to apply for its credit card.

Are there additional charges?
Yes. Many credit cards companies charge an annual management fee of between £10 and £12 irrespective of how often you use the card, though some will waive it once you have spent a certain amount.

Many companies levy a range of charges if you break the terms and conditions of your credit card or if you require additional services. Exceeding your agreed borrowing limit or being late with a monthly payment usually incurs a fixed penalty fee. The credit card issuer will apply a charge if you request an additional monthly statement or a second credit card for a partner, if your cheque of direct debit to clear any of your outstanding balance returns unpaid or if you use your card overseas.

Credit card companies cannot simply apply extra charges willy-nilly. When you obtain your credit card, the issuer will send you a booklet setting out the credit card’s terms and conditions and details of any extra charges will be included. It is vital that you read the booklet thoroughly and keep it in a safe place. Some credit card issuers detail the charges they can levy on the reverse of your monthly statement.

How much do I have to repay each month?
Most credit cards issuers stipulate a minimum payment of £5 or 5% of the outstanding balance on the credit card account. But remember that any uncleared balance will attract interest charges. Every month, your credit card issuer will send you a statement detailing transactions on your account and the outstanding debt. It will also include details of the minimum payment required and the date by which this should be paid. You can make the payment by post or at your local bank, though the bank may charge for this service.

How much can I spend on my credit card?
The credit card issuer will set a limit when it assesses your initial application. Usually, after six months it will review the limit and may increase it. It will usually inform you of a new spending limit by writing to you or by a note on your regular monthly credit card statement. But do not simply regard an increase in you limit as a licence to spend – you still have to repay the money eventually and pay interest on the dept in the meantime.

Can I have any credit card I choose?
Yes, you may apply to any credit card issuer. Some recent players on the UK credit card scene, such as US companies Capital One Bank and People’s Bank Connecticut, offer more attractive rates than traditional credit card providers such as Barclaycard. Today there are about 1.300 brands of credit card in the UK, offered through more than 30 credit card issuers.

When you apply for a credit card, the issuer will first carry out a credit check on you. Your application may be turned down, especially if you have a poor credit record (see below). Amazingly, some issuers have even turned down customers because they have never previously held a credit card.

Can I transfer my balance to a credit card that offers cheaper interest rates?
Many credit card issuers actively seek customers willing to transfer credit card debts from another provider by offering enticing introductory interest rates and tend to apply only to the amount of debt you transfer rather than any new balances you incur. They usually last for a predetermined period, typically six months. When you transfer, your old credit card company should not levy any exit charges – indeed, it might tempt you to stay by offering to cut its interest rates or waive its annual fee.

Can I get my credit card issuer to reduce its interest charges?
Some issuers levy reduced charges on customers who agree to have the minimum monthly payment paid from their bank account by direct debit. Other charge lower rates if you use your credit card a lot.

Can I withdraw cash on my credit card?
Yes, though you need to tread carefully. Most credit card issuers Charge higher interest on cash withdrawals than on purchases while some levy a fixed transaction fee of up to £5. They also charge interest immediately – there is no interest-free period. When you receive your credit card you will also be sent a personal identification number (PIN) under separate cover. By using this number you will be able to obtain cash via an ATM (automated teller machine) or cash machine.

What about credit card incentive schemes?
Many credit cards offer incentive schemes to encourage you to use your credit card more. Barclaycard, for example, offers Profile Points that may be redeemed against goods bought through the Profile Points catalogue. Cashback credit cards are also increasingly popular. With these you earn ‘cash’ every time you use your credit card. However, you should not choose a credit card simply because it offers an attractive incentive scheme especially if you are using it to borrow. The competitiveness of its interest rates and charges should be the most important determining factor.

Companies that offer incentive schemes as part of their credit card package include Alliance & Leicester, American Express, First Direct, Goldfish, Liverpool Victoria, Midland Bank, NatWest, Sainsbury’s Bank, Tesco and TSB.

What about gold credit cards?
Gold credit cards were once the preserve of the rich, but these days you do not necessarily have to be wealthy to qualify for one. However remember that its interest rate may be higher than a normal credit card and that you will be paying for a range of benefits, such as travel insurance, that you may not require. Platinum credit cards are available.

What about store credit cards? Are they a better deal than a traditional credit card?
No. The only reason to apply for a store credit card, which is simply a credit card issued by one particular retailer, is if the store does not accept other credit cards. But beware – most store credit cards levy high interest charges. Major stores that offer credit cards include John Lewis, BHS and Marks & Spencer.

What about affinity credit cards? Are they worthwhile?
Affinity credit cards may be linked to a leading charity or even your favourite football team. The charity or affinity group benefits in two ways – it receives a payment when you first take out the credit card, plus a sum linked to the level of your credit card spending. Interest rates tend to be in line with those levied on traditional credit cards, but do not expect a more benevolent attitude just because your credit card it linked to a charity. If you fail to repay the minimum monthly payment on time you will still be hit with a penalty charge. ( life Insurance )

How do I compare the competitiveness of individual credit cards?
All credit card issuers are required to tell you the annual percentage rate (APR) levied on transactions. In theory, this is a measurement of the cost of credit and takes into account the monthly interest charge levied by the card issuer and any annual fee it may charge. But this calculation is flawed because it fails to consider any interest-free period offered by the issuer. Some issuers have manipulated the APR by using assumptions that reduce the impact of their annual fees on the rate they quote. A better competitive test for potential credit card buyers is to compare the monthly interest rate and the annual fee charged by different providers.

The way you intend to use your credit card should also influence your choice. If you simply want to use a credit card to obtain interest-free credit, then find one that levies no annual fee and offers the maximum 56- day interest –free period. The interest rate that the cared levies will not concern you if you do not intend to borrow. However, if you intend to use your credit card for short-term borrowing the monthly interest rate is all important.

Who offers credit cards?
All the major UK banks – Barclays (Barclaycard). Lloyds TSB, HSBC and NatWest – offer credit cards. But these tend not to offer the best deals around and credit cards are now available from leading building societies (Nationwide), newly converted banks (Alliance & Leicester), friendly societies (Liverpool Victoria), American banks (People’s Bank Connecticut, Capital One) and even leading supermarkets such as Sainsbury and Tesco.