When you use a credit card you are essentially borrowing money from the provider with the understanding that you will clear this balance later.
Credit cards are unsecured loans.
A credit card is basically just an unsecured loan that you take out. An unsecured loan is simply a loan where no collateral is put up.
A limit on how much you can borrow is determined beforehand and this is known as the “cap”. Different cards will offer different interest rates and this will also vary depending on your credit score and history as well as your personal information. The interest rate on a credit card is calculated per annum and is referred to as the Annual Percentage Rate or APR. Remember the interest rate and the APR id different because the APR includes additional fees you'll incur.
If you are offered a great interest rate but the APR is high – you may be getting a more expensive deal than you think – so compare the APR instead of just the interest rate which represents an indication of the monthly repayments rather than the overall cost of a deal.
If the APR is 10% and you borrow £1,000 then you will have to repay the £1,000 plus the interest which will work out to £100 however this is only true if you pay the amount back in one year. To find out how much it will cost you monthly we need to take the APR and divide this by 12 (10% / 12 = 1.0), so it would cost you £10 per month.
Note that the APR provided by different lenders does not always factor in the same things so it’s important to ask what is and isn’t included in the APR.
Credit cards are certainly the cheapest form of debt there is and are mostly used for spending purposes.
This could be for big purchases like a fridge or television and for smaller purchases like clothing. When you use a credit card to purchase items you also receive payment protection which essentially allows you to get a refund from the lender if whatever you purchased was damaged or faulty.
What are Purchase cards?
Purchase credit cards are also used to pay for flight tickets, hotels and online shopping. You may even be able to purchase a vehicle using this type of card if the retailer accepts credit cards. This type of card is known as a purchase card. You must ensure you are aware of when the 0% interest period will end so that you can make the necessary arrangements to pay it off in time.
The reason that many people experience trouble with purchase credit cards is because they tend to overspend on them and then are unable to clear the balance before the hefty interest rates kick in.
In addition, missing a single payment on a 0% interest purchase card may cause you to lose the deal entirely. You may be able to use a balance transfer card to avoid this unpleasant situation but it’s best to avoid it completely.
What is a Balance transfer card?
The second most popular type of credit card is the balance transfer card which allows you to transfer your balance of other cards to it where the interest rate is 0%. This allows you to pay off the balance without incurring any interest fees.
Many people use this type of card to consolidate debt from many different cards into one much more manageable balance. This 0% interest free is limited to a specified time period after which a normal APR will be charged on the remaining balance. If you can manage to pay off the entire balance or the majority of it before this time period ends – you'll save a lot of money.
When applying for this type of card it is always best to check the APR that will come into effect, the 0% interest time period as well as the handling fees.
It is important not to make purchases on the balance transfer card – especially once you’ve consolidated your debts to it.
What is a Money transfer card?
The third most common type of card is a money transfer card that is designed to allow you to transfer money from your credit card to you regular bank account.
You will then owe the money you’ve transferred on your credit card – sometime at 0% interest for up to 2 years. You will however have to pay a fee in the form of a percentage of the amount you transfer from the card to your bank account. Once the interest free period expires you will be liable to paying a full interest rate on your remaining balance – so once again you must manage the balance well to benefit from this type of card.
And finally, the low APR card.
The final card we’re going to discuss is a low APR card which is best for those who are looking to pay off the balance over a longer period of time at a low APR. The low APR will stay in force until you’ve paid off the entire balance so you don't have the risk of having a large balance to pay off after the 0% interest free time period has run out.
When we compare credit card interest rates to that of other forms of short term debt such as a payday loan – if you're likely to be in this situation you may want to consider a credit card with low interest rates for cash advances because it will always work out cheaper than a payday loan. Although credit cards are by far superior in terms of lower interest rates, with so many offers available it may be difficult to choose the right one for your needs.
It’s even more frustrating when you know which credit card you want but don't meet the application criteria.
Since your credit score will determine whether or not you're eligible for a credit card it is important to pay particular attention to your credit score from as early as possible. If you don't work on improving your credit score you may not be able to finance a car or be approved for a mortgage. Although these types of limitations may not seem too bad for someone who’s a recent graduate and just entering the job market – you should know that your credit score will also affect your insurance premiums and cell phone contracts in addition to other essentials.
If you apply for a credit card and are denied – it leaves a mark on your credit history, so it’s crucial to ensure you actually meet the requirements before making an application.
If you're denied too many times in a relatively short space of time – you're surely going to make matters worse so only reapply after at least six months. Obtain a copy of your credit report and check to see that no mistakes have been made as this does happen. If you think there is something wrong with some of the information you must communicate it with the relevant lender but be prepared to provide them with proof – or you'll be in for quite a battle.
Once you’ve determined that the information is true and correct you should then work on each item that is having a negative impact on your credit score.
In addition to actually meeting the minimum requirements your credit score will also determine the deals and rates that you get on the various products lenders offer. You may be interested in a low – or 0% interest rate or you may be interested in the reward points, travel rewards and cashback that some credit cards offer. It goes without saying that choosing the right credit card for your needs is simply a case of taking your lifestyle and personal needs into account.
Improve your chances of getting a Credit card.
To improve your chances of getting the credit card you want you need to understand how credit card companies evaluate you and what they’re looking for.
Apart from the different criteria each lender may have, each product will also has a separate set of criteria. Firstly you'll be required to complete an application form after which the lender will run a credit check on you. They will then compare your debt to income ratio to determine if you will be able to afford the repayments if you’ve maxed out your credit card. If you meet the minimum requirements they set, they will then have to decide on what the limit of the card will be as well as what interest rate they’ll give you.
There is no way of actually knowing what this limit will be until after you’ve applied. If you have a good credit score and have a stable work history – you'll get a better interest than someone who doesn’t. These lenders want to make sure that you'll repay any money you borrow so if there is anything that shows them otherwise – your application will probably be denied.
A few common requirements are that you must be at least 18 years of age, have a stable income of at least £10,000+ and are a UK resident. In addition to checking your credit score and the requirements of the card you want you should also create a budget that will ensure you keep up with repayments and still have something left over.
The best credit cards on the market are those with a 0% interest for new purchases and 0% APR balance transfer cards. The term during which the 0% interest deal on purchase cards stands will vary from one card to another but currently the longest term available is a 29 month period. If at any time during the deal term you fail to make your minimum payment – you may lose the deal so ensuring you pay on time is critical if you want to keep things in the green. Other cards that are really in demand are the ones with the best cashback rewards but both these types are very hard to get unless you have a perfect credit history with no late payments or outstanding debts.
Credit cards for people with bad credit.
So what do you do if you have a poor credit history and have been previously denied by a lender? The best thing to do in such a situation is to apply for a credit card that is specifically designed for those with poor credit such as a credit-builder card. These cards will by no means match the previously discussed deals as the interest on these are much higher and the limits much lower but it will give you a chance to build your credit score and have access to credit. This card allows you develop the habit of repaying your debt and will allow you to apply for a regular credit card in the future so try and set up repayments via a direct debit and never exceed the limit or you'll make the situation worse. This is also the best option for someone who is applying for their first credit card and has very little or no credit history as it will allow them to build one within a year.
There is some simple and accurate credit card search and comparison tools that you can use to gauge which cards you're likely to qualify for – one such tool is the MoneySupermarket smart search which offers a range of the most competitive cards.
Once you’ve found a card that you want and have ensured you’ve done everything possible to ensure you meet the requirements you can then go ahead and apply. The best and easiest way to do this is via an online application but if you feel like you need some reassurance you can visit the branch and talk to a representative. You'll find out if you’ve been approved almost immediately in which case you'll need to fill out some forms after which you'll be contacted with the details of the card such as the interest rate, deal term and limit.
You will also receive a credit card summary with all the important details which you should review closely before agreeing to. Here you will see the APR, interest free period and all the rules regarding purchases, balance transfer, cash advances and so on – non applicable items will be marked accordingly.
Once you’ve agreed to the deal he card will then be posted to you.