It was just a few short years ago that having a number of credit cards was the done thing. We moved our money around, took advantage of 0% balance transfer credit cards, had more than just one or two deals and generally felt comfortable with the whole idea of debt. Things have since changed, however, and for those now considering a new credit card, the options are fewer and the prospect requires more thought. Knowing your way around what is involved in getting a credit card and how to manage it properly once you receive it can make it much less frightening, which consequently allows you to manage your debt responsibly.
The UK Cards Association provides guidance for those of us considering a new credit card. Its website gives great advice on how to make the most of having a source of credit and how best to avoid getting into unmanageable debt.
The advantages and disadvantages of credit cards
Before deciding to apply for a credit card, you should consider the pros and cons. Of course, being approved for a credit card, particularly one with a zero per cent rate, can be a great way of receiving a free short term loan. If the balance is paid off in full each month, it is a very flexible way to spread your payments.
Credit card companies are obliged to protect you against fraud; they will reimburse you if your card is used by criminals. Credit card companies may also offer great incentives to use their cards; these can include loyalty points, cash back or even donations to your favourite charities. One of the best things about having credit cards is the fact they are usually accepted worldwide, giving you access to money just about anywhere.
There are disadvantages to credit cards as well, though, especially if you overspend. If you are unable to pay your minimum payment on your credit card or you pay it late, you will find that you will incur penalty charges, which can be large. In addition, cards with promotional zero per cent rates may have this incentive removed if a late payment is made. Not all credit card companies do this, but it is worth bearing in mind.
Some people may get themselves into trouble because they take out more cards than they're able to handle. This leads to them using one card to pay off another, which can lead to an ever-worsening spiral of debt. Obviously, if you find yourself in this position you need to contact your lender as soon as possible. Finally, just paying the minimum payment on any credit card will take a long time to clear the debt, perhaps longer than it might have taken for you to simply save up for what you wanted to buy.
Information you need to know
Obtaining credit is essentially like having a loan. Your credit card issuer will want to ensure that you are a good credit risk before they agree to lend you money. Before you are issued with a credit card you will be checked through a credit reference agency. This will highlight any problems you may have had in the past with other forms of credit. The credit card companies will use this information to work out what limit will be placed on your card and, occasionally, what your interest rate will be.
Credit card companies have to provide you with full information about the product you are receiving before you agree to accept it. Make sure you read this and understand it fully. This is particularly the case when it comes to zero per cent interest rate deals. These usually apply for a set period of time, such as 12 months, and may or may not apply to purchases as well as money transfers. It is very important that you are aware of when the promotional rate ends, as you will need to pay off the balance by then to take advantage of the rate correctly. Once the rate ends you will need to transfer to another zero per cent deal or have it paid off. There is usually a balance transfer charge when moving a balance from one card to another, so factor this cost into your calculations. Bear in mind that even though there is no interest being charged on your card, you will still need to make payments every month. This is not free money, after all.
Rates and fees
When you make payments on your credit card you may assume that your zero per cent balance transfer is being paid off last and the more expensive debt is paid off first. This isn't always the case. Some cards will pay off the most valuable debt last, which means that you may pay a higher interest rate for a longer period of time.
Credit cards - even those with zero per cent deals - will usually charge fees of some sort. You may find you have to pay fees for cash withdrawals, foreign currency transfers, balance transfers and for using credit card cheques. While most of these charges are pretty much standard across the board, it may be worthwhile checking out the best offers if you think you might be taking advantage of any of these services.
Choosing a credit card
When deciding on the best credit card to get, you should think through the available options and really compare how much it will cost you to manage your card. While choosing the best available zero per cent deal might seem obvious, it does not always mean you have the best deal in the long term. Compare the APR on each of the different elements of the card. There may be different rates for balance transfers, cash withdrawals and purchases. You need to consider which of these you are likely to do most often.
You also need to compare the allocation of payments, as explained above, and how fees are charged on each of the cards you are considering. Special incentives may also be worthwhile factoring in to your decision.
So, hopefully you are a little clearer on the factors you should consider before you step into the world of credit cards. It may be more difficult to get a card nowadays, but there are still some great deals to be had.