Credit Cards: Using A Credit Card

The best way to use a credit card is to think of it as a convenient tool to help with cash flow and budgeting. By using your card, you can defer payment for goods and services for up to two months, without paying any interest at all. But to do this, unless you are taking advantage of a longer-term interest-free credit card you must pay off your entire balance each and every month; otherwise interest will start clocking up at an alarming rate.

Even missing the odd month here and there can be expensive, because most cards charge interest from the original transaction dates until your entire balance - including accrued interest - has been cleared. What's more, paying only the minimum monthly repayment each month can turn a balance of, say, just £2,000 into a debt that lasts forty years or longer. Hence, each month, try to pay off as much of your balance as you can. Otherwise, left untouched, your debt will just get bigger and nastier!

Equally, don't make the mistake of thinking that your credit limit equals 'free money'. It doesn't! In fact, hitting or exceeding your credit limit suggests that you may have a problem with spending and budgeting. Another warning sign is when your card issuer keeps upping your credit limit without being asked. If you see a £1,000 increase in your credit limit as another £1,000 in your pocket, then you may have a problem with your relationship with money. Always remember that you can only spend £1 once and that any money spent on your credit card will have to be paid back at some point in the future!

If you're unlikely to be able pay off your bill in full every month then make sure you know what the interest rate is, not least because companies increase rates with hardly any warning. The Annual Percentage Rate (APR), is a basic - but not perfect guide - to the amount of interest you'll pay so the lower the better. Don't be fooled by statements that only quote monthly interest rates - '1.5% a month' may not sound a lot, but it compounds up to 19.6% APR. (Because of interest being charged on interest and so on, the annual rate is always more than simply twelve times the monthly rate).

Most bog-standard credit cards offer between 45 and 59 days of interest-free borrowing. If you buy something just after receiving one monthly statement, it will appear on your next statement, after which you'll then have between 14 and 28 days to pay off your bill in full in order to avoid paying any interest at all. Hence, it's worth holding off making big purchases until just after your monthly statement is produced, in order to benefit from the maximum interest-free period.

And finally, avoid drawing out cash on your credit card! Firstly, you start paying interest at sky-high standard rates from the moment that you withdraw your cash until every last penny of your bill is paid off, including interest. Secondly, credit-card issuers charge steep fees if you use your card to withdraw cash at a cash machine or over the counter. Stick to your debit card for cash withdrawals otherwise expect to pay a charge of around 2% (minimum £2) per credit card withdrawal.

Next article: Credit Card Pitfalls

Published on November 15, 2006