Choosing a credit card can seem complicated. What with introductory offers, APRs, annual fees and foreign transaction fees, it can seem a bit daunting.
So in an effort to simplify things just a bit, here are the five things that you absolutely must know about a card before applying.
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1. Interest rates
These are right up there. Interest rates are charged on any debt you owe, and are usually broken down by rates for purchases, balance transfers and money transfers.
My top tip is to look at the card’s summary box on the provider’s website. In this, there should be details about all three.
Simply put, the purchase rate is the interest that you will be charged on purchases if you do not pay the amount off in full. To help put this into perspective, the average credit card purchase rate in the UK is around 18%.
Similarly, the balance transfer rate is the interest you will be charged on any balances you transfer and do not pay in full if you do not have an interest-free offer in place (an additional fee is sometimes attached to making a balance transfer).
Money transfers (where you use your credit card to pay cash straight into your current account) are often charged at a higher interest rate than purchases and balance transfers; some cards won’t allow you to pay money transfers at all.
2. Minimum repayment
Knowing how much your minimum repayment will be on a credit card is very important, as missing a payment could negatively impact your credit score.
It is advisable to pay off your credit card balance in full each month (rather than pay interest on it); if this is not attainable, then you will need to know how much your minimum repayment will be, as this can vary from card to card.
Some cards have a relatively low minimum repayment of £5 (or the full balance if it’s less than £5), while some others are higher at £25. You need to make sure you can afford to make the minimum repayments, as if you don’t you risk incurring late payment fees and damaging your credit rating.
3. Penalty and transaction fees
It is worth noting what additional fees your chosen card may charge and how much they are. Typically, credit cards have fees attached for missed payments, late payments and going over your credit limit. On average these are around £12, but the fees depend on the individual cards.
Then there are also fees for things such as balance transfers and cash withdrawals. So, for example, if you were to make a cash withdrawal of £10 with your credit card and your card had a cash withdrawal fee of 3%, you would be required to pay 30p in charges.
Knowing in advance about the costs associated with credit card transactions can help you keep on top of your spending and balance.
4. Overseas usage fees
You may not be planning to use your credit card abroad, but if you find yourself on holiday and reaching for the plastic, first find out whether your credit card has a foreign transaction fee. A foreign transaction fee is typically around 2.99% and is charged on transactions made outside the UK.
Some specific travel credit cards sell themselves on not featuring this fee, meaning you can use them abroad and, as long as you are paying in the local currency, you won’t be charged for doing so.
Additionally, some travel cards may also waive their cash withdrawal fee for ATM withdrawals made abroad. As with everything else, all the details of what your card has to offer can be found in the summary box.
5. Credit limit
Now this is more one for after your application, but knowing your credit limit can help you to borrow responsibly. It is important to know your credit limit, as if you exceed it you will be charged a fee and damage your credit score.
Credit limits are decided by the provider, based on your individual circumstances. Most credit card applications will require you to input some basic information about your income and outgoings, and your credit limit will then be decided against these criteria and information from your credit report.
If you are unhappy with your credit limit, you can request for it to be increased. There is no guarantee you will be able to achieve an increase, though.
Note that your credit utilisation is also factored into your credit score. (The 30% rule says that you should typically use only 30% of your available credit at any one time.) Knowing your upper limit is, therefore, key to planning your spending.