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Credit cards can be useful to have in your back pocket if you are short on cash. However, credit cards and interest go hand in hand. It can be all too easy to find yourself with an outstanding balance and growing levels of debt. So, are credit cards free if you pay on time? We’re here to break down how best to use your credit card.
Will I be charged interest if I pay on time?
To understand whether or not you will be charged interest, you need to understand how credit cards work.
A credit card typically has four rates of interest. There is the purchase rate, the cash advance rate, the balance transfer rate and the money transfer rate.
When you are charged interest depends on what type of transaction you have used your card for.
Purchases are what most people use their credit cards for. And the good news is that if you pay your balancein full and on time, your credit card will be free. Most credit cards offer a period of up to 59 days interest free if you pay off your bill in full each month. So you could purchase something using your card, and as long as you pay if off in full when you receive your monthly statement, you won’t incur any interest charges.
Cash advance rate
Cash advances are very different to purchases and here is where you need to be careful. If you withdraw cash using your credit card, you are charged interest from day one, at a daily rate.
So even if you pay your balance on time, the likelihood is that you will still have incurred some interest charges. If you do find yourself having to withdraw cash using your credit card, try to pay this off instantly in order to avoid paying interest.
Balance transfer and money transfer rate
Balance transfers and money transfers are not available on all credit cards. But if your card does have these functions, they will have their own interest rate.
In order to make this transaction ‘free’, you need to get yourself a 0% balance transfer or 0% money transfer card. If you make a transfer and you aren’t in a promotional period, interest will be charged even if you pay your balance on time and in full.
Are there any fees attached to a credit card?
If you want your credit card borrowing to be free, then you must also be aware of any fees you could be charged. Let’s take a look.
Not only are you charged interest from day one when you withdraw cash using a credit card, but you are typically also charged a cash fee. This is usually around 2.99% or a £3 minimum payment.
Balance transfer/money transfer fee
Even if you have an interest-free period on your balance transfer or money transfer card, you will most likely find the card carries a transfer fee. This is usually a percentage of the amount you wish to transfer.
Non-sterling transaction fee
A non-sterling, or foreign transaction fee is what you are charged if you use your card abroad. You can find credit cards that allow you to do this for free (take a look at our pick of the best travel cards). But most cards will charge you a percentage of the transaction in fees if used outside the UK.
Are there charges if I don’t pay on time?
If you fail to pay your balance on time, then you will incur interest charges. Even if you pay your minimum payment, any outstanding balance will incur interest (unless you have a 0% purchases card). And with compounded interest – where you pay interest on your interest – you could quite easily see your levels of credit card debt rise.
Similarly, most cards have penalty charges if you don’t pay on time. Late payment fees are typically around £12.
And finally, you could damage your credit score if you don’t pay on time. Any missed payments will appear as a black mark on your report. A large amount of credit card debt could also work against you.
Looking for a new credit card?
Great credit card offers are out there — you just need to know where to look! If you’re after the top offers on the market, a great place to start is our list of the top credit cards.
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