FOOL'S EYE VIEW
10 Essential Facts About Credit Cards

By David Kuo (TMFDragon)
April 18, 2002

When used carefully credit cards are a flexible source of unsecured borrowing. However if misused that flexible friend can soon turn into an unbending foe that could severely damage your wealth. Here are ten facts about credit cards that any canny consumer should be aware of.

(1) Buy Now But Pay Later

Credit cards first made their appearance in 1950 when Diners Club and American Express launched their idea for "plastic money". At that time only a couple of hundred cards were issued but today more than a billion cards are in circulation. The main attraction of using credit cards revolves around the idea of deferred payment. This means that cardholders can buy a product or service today but choose to pay for it at some later date.

(2) How Credit Card Companies Make Their Money

Credit card companies make their money from two main sources. They charge the merchant a commission on each transaction and that transaction rate can vary from 1% for larger shopkeepers and up to 5% on certain cards for smaller retailers. That is why smaller shopkeepers will probably be more prepared to offer you a discount should you ask to pay for your purchase in cash rather than on plastic. The other source of income for credit card companies is the interest that is charged on overdue and outstanding balances.

(3) Know Your APRs

The APR or Annual Percentage Rate is the rate of interest that the card company charges on any outstanding balance. This interest, which can vary from company to company, is levied on balances outstanding, after what is known as your free period. But to benefit fully, cardholders should be aware of their statement cut-off period, which can be as much as 56 days. If in doubt about your statement date, just ask your credit card provider. With some companies you can even choose your own statement date to suit.

(4) Affinity Cards Are All The Rage

You may have noticed that your old Alma Mater or professional association has asked you to sign up for their new credit card. These cards are known as affinity cards. They will invariably carry the logo of an association or club that you are familiar with but they will also be affiliated with one of the major card companies. These cards usually offer some unique benefit or privilege and some card providers might even offer significantly lower interest rates.

(5) Cash On Your Credit Card

Some credit card companies let you to draw cash up to half your approved credit limit. In fact they actively encourage this. But with most cards there is no free period for cash withdrawals and you will be charged interest from the moment that you use the cash advance facility. So the simple advice here is not to use your credit card for cash advancement unless you absolutely have to.

(6) Consumer Rights

Under the Consumer Credit Act 1974, when you make a purchase with your credit for goods over £100, the credit card company is also liable if the goods or services are faulty. So if the retailer won't replace or refund your money you can then take the matter up with your credit card provider. Under Section 75 of the Act the credit card company is just as liable as the trader and this can be quite useful if the shopkeeper has gone out of business.

(7) Avoiding Credit Card Fraud

Most shops are now equipped with electronic devices that will validate and accept card payments. These could be stand-alone PDQ terminals or card recognition gizmos build into the tills. With these electronic devices the possibility of fraud is reduced since each transaction, regardless of the amount, is immediately verified. Also there is little chance of card details being deliberately lifted. However, some shops still rely on the older method of rolling the card onto a payment slip. In this situation ask for the carbon separation to be torn up to avoid card details falling into the wrong hands. 

(8) Floor limits & Additional Checks

If you have ever suffered the embarrassment of being asked to wait while your card is verified then you have most probably encountered what is known as the shop limit. Each retail outlet has a limit above which it must get separate authorisation from the card provider. Sometimes you might have used your card in a manner that the card provider considers to be unusual. This could be because you have used your card too many times in one day or in perhaps in outlets that don't quite fit your personal profile. So instead of getting hot under the collar just be thankful that the card provider is looking after your interests.

(9) Ever Been Refused A Credit Card 

Most of us like to think that we are credit worthy and have a right to a credit card. However, credit card companies can take a very different view. Remember credit cards are a form of unsecured credit and the card provider is taking a risk when they issue you with that piece of plastic. However if you believe you have been denied a credit card unfairly then it is always a good idea to check your credit rating with one of the credit reference agencies. For the sum of £2 Experian, a division of GUS (LSE: GUS), will send you a copy of your credit reference file.

(10) Minimum Payments And Their Dangers   

Credit card companies want you to make the minimum payments only. But don't ever give in to this temptation. Try and pay off as much as you can and better still pay off the whole amount if you can. Minimum payments are usually worked out at 2% of the total outstanding balance or £10 whichever is the larger. But if you choose to pay just the minimum amount on, say, a £500 credit card bill that charges an APR of 15%, it would take you over 6-1/2 years or 79 payments to clear your debt. Furthermore you will have paid almost £290 in interest on that £500 purchase.

More: See our Credit Card Centre