The first known use of credit cards originated in the US back in the 1920s, but they have since exploded across the globe to become one of the most prevalent forms of borrowing.
More than half of British adults own at least one credit card and there are literally thousands of different cards and providers to choose from. So how do you get up to speed on what's out there and how do you decide which is the best credit card deal for you?
Why use a credit card?
While the main attractions of personal loans are the reassurance of fixed monthly repayments and the loan paid off at the end of the term, credit cards offer the borrower much more flexibility and control. In essence, you are in the driving seat as to how much you borrow, when you borrow and how much you choose to pay back.
Credit cards are generally used for small to medium purchases, such as paying for petrol or a restaurant bill, or buying a new TV or items of furniture. They offer a number of advantages. As a result, credit cards have become a feature of our financial lives, but the market has become complicated and overcrowded, with literally thousands of companies trying to get their credit cards into your wallet. So what do you need to know when selecting the best credit card for you?
Credit card schemes
Credit card schemes, such as VISA and MasterCard, are not to be confused with the banks and lenders who offer credit cards to consumers. Effectively, the role of the schemes is to operate and settle payments made with credit cards. All British banks and lenders must be members of an appropriate scheme in order to issue cards and generate transactions. The majority of credit card issuers offer the choice of either VISA or MasterCard, but both schemes are accepted almost everywhere (both in Britain and abroad), so it should make little difference to you which scheme you go with.
Interest rates on a credit card tend to be much higher than for personal loans, generally ranging from between 12 per cent and 19 per cent. Unless you are able to pay the amount borrowed back in full every time you use your card, the interest rate should be one of your main priorities. Credit card advertising will display an annual percentage rate (APR), which should allow you to compare rates across the market.
The APR on a credit card is likely to be a variable rate, which means it can go up as well as down. Your card issuer is required to give you sufficient notice of any change to your APR. Be aware of any other additional charges, such as annual fees or joining fees, as some may or may not include these charges within the APR.
Introductory interest rates
The low interest rate environment of recent years has meant that the credit card market has become highly competitive. As a result, many card issuers offer generous introductory offers in order to attract new customers. Rather like mortgages, these are based on much lower interest rates for a fixed period of time, before reverting to the standard variable rate after the introductory period ends. For example, a credit card issuer might offer a rate of 3.9 per cent or even zero per cent for six months on purchases made within this period, before reverting to 15.9 per cent. The hook is there to get you in and to promote the usage of the card, but if you don't pay off the balance in full by the end of the introductory period, you will pay the standard variable interest rate on the remaining balance.
A number of credit card providers offer a zero per cent introductory discount for up to 12 or even 18 months. More recently, such exclusive offers have been limited to balance transfer deals, as lenders know there is an increasing chance that there will still be an outstanding balance on the card that will incur the standard variable interest rate after the introductory period ends.
Balance transfer rates
With Britons carrying more unsecured debt than ever before, many are forced to juggle their debt around a variety of vehicles to minimise the monthly repayments. This has led to the rise of balance transfer deals, championed by the credit card lenders themselves. Most credit card lenders offer a lower percentage rate if you transfer the outstanding balances on your other cards to the new one.
Many of these deals today are at zero per cent for a fixed period and, as such, consumers have become very savvy about continuously transferring from one card to the next at the end of each introductory period. These consumers have become known as 'rate-tarts'. Of course, the card issuers make no money from this consumer behaviour and they have reacted by introducing balance transfer fees. These are usually between one per cent and three per cent of the balance being transferred. Check the small print to see how much the fee is before agreeing to transfer a balance.
More recently, card issuers have launched low rates for balance transfers for the life of the balance. This means you only pay that low rate on the balance transferred until it's completely paid off. As long as you are aware of all the charges, rates and introductory periods, you could save money by taking advantage of such deals.
Incentive schemes or reward programmes
Many credit card issuers offer dedicated reward programmes or incentive schemes. This is to encourage card holders to use their card regularly. Such incentives include:
- Cashback - a percentage of the amount you spend over a given period is refunded to you
- Air Miles - a certain number of Air Miles are awarded to you, based on the amount you spend
- Points/discounts/rewards - the more you spend, the greater number of points or discounts or rewards you receive from selected partners
- Affiliation cards - often linked with charities, a donation is made to the charity based on a percentage of the amount you spend.
While these programmes can be rewarding, you often have to spend a large amount of money to receive the rewards.
Which credit card is best for you?
The credit card that is best for you will be determined by your own circumstances and how you plan to use it. However, whatever your circumstances, you should ask yourself the following questions to understand your requirements:
- Do you want to transfer a balance from another card?
- Are you planning on making a new purchase or two?
- Will you be repaying the full amount within a set period?
- Are you intending to pay the minimum each month?
- What is the standard APR on the card?
- Is there an introductory offer? How long is it for?
- Is there a fee for transferring a balance? How much is it?
- What other fees are there?
- Is there a loyalty scheme or reward programme available?
Additional features you should look for in a credit card:
- An interest-free period of between 35-64 days from when you purchase the item, to when you are expected to pay the bill
- A fraud guarantee to protect you if you become a victim of credit card fraud or identity theft, meaning you only pay a small fee in the event your card is used by someone else without your knowledge
- 24 hour emergency replacement card cover in the event of a lost or stolen card
- Optional payment protection insurance to cover you should you become unable to pay your bill
- Extended warranty on the goods purchased, to insure them against loss or damage.
Understanding your requirements will help you choose the most appropriate credit card for you and your circumstances.
Applying for a credit card
Applying for a credit card is a relatively straightforward process. Pieces of direct mail that fall through your letter box will more often than not contain a full application form for you to complete and send back in a prepaid envelope. Alternatively, you can easily apply online with almost every card issuer. After you have submitted your application, a credit check will be conducted.
Banks and lenders will conduct a credit check on anyone applying to borrow money, whether it is a credit card, personal loan or mortgage. The credit check will give them information on your payment history, including whether you have missed payments in the past, have County Court Judgements against you, or whether you have a history of being a reliable borrower. The check will also inform them of the total amount of outstanding debt you have with them or with any other lender(s).
The questions answered in your application, along with the details of your credit check, will provide the lender with your credit score. If you score well, based on their lending criteria, you will get the credit card. If you fail to score highly enough, you will most likely be turned down.
You have the right to access your own credit report to see what information is held on file about you. It is advisable to look at your credit report before applying for a loan, credit card or mortgage to see if the information is accurate. Every credit check you trigger will be logged on your credit file, along with any rejections from lenders. This will have a negative impact on any future applications you make.
Payment protection insurance
During your credit card application, you may be asked if you would like to take out a payment protection insurance policy with your card. This product works by insuring you against accidents, sickness or unemployment and the potential loss of income from these events that may mean you are unable to meet your repayments for a certain period of time. Lenders will try to sell this insurance to applicants, as it's a profitable product that often subsidises the low interest rates they offer. Remember, this cover is optional and you will not be penalised by the lender for not taking it out, so make an informed decision.
Once you have been approved for your credit card, you will be given an agreed credit limit. This will be determined by a combination of your salary, your credit score and the lender's appetite to grant credit.
With most credit cards, you will have the option of paying the full amount off each month, paying different amounts off each month, or repaying the minimum amount. The flexibility of credit cards makes them an attractive option, but do try and avoid only paying the minimum amount each month, as this will rarely help clear the balance and will cost you significantly more in interest in the long run.
Be aware of penalty payments, as these can often be very high. Make sure your payments are with the credit card issuer in enough time to avoid penalties. Late payments will also adversely affect your credit record, so avoid them at all costs. If you run into any problems paying your bill, contact the card issuer at your earliest convenience and try to negotiate a solution that suits you both.