What is a Credit Card?
A credit card is an open ended lending product.You can use it when you want or not at all.It will have a max amount you can spend known as your credit limit.Credit cards come with benefits, they can help you improve your spending power, avoid interest and build your credit score but they also come with serious potential risks.
Firstly before applying to or accepting a credit card you must know the APR, any and all charges(advance charge, late payment charge,foreign exchange charge etc) it includes such as the annual fees which are now added to the APR to make it easier to compare against other cards.
Credit Card balance
If you pay your credit card balance in full each month you will have no interest charges to pay. This means you can use any extra disposable income you have to invest or save.
Credit Card due date
Ensure you know what date your credit card payment is due every month and what minimum payment is due. Set payment reminders or set up an automatic direct debit payment to your credit card.
Missed Credit card payments or minimum payments
If you miss your credit card payment or pay only the minimum payment due you will incur interest charges on your balance and late fee charges if you don't make the minimum payment on the due date.
Any late payment on your credit card will be reported to the credit bureaus and this will stay on your credit file for at least 6 years. It will negatively affect your credit score.
This will lead to higher interest and prevent you from accessing credit from a few lenders
Paying off your Credit Card
Paying off your balance in full each month will avoid you paying interest and will improve your credit score and lead to cheaper interest rates on your credit card and other credit products.
Carrying over a credit card balance from month to month will incur interest rate charges and the longer you carry this balance the bigger the amount you owe will increase due to compounding.
Compounding or compound interest
Compounding is when the interest on a capital is added to the capital and more interest is then charged to it.
For savings this means if you invest £100 at 10% interest per month and get £10 in interest payments. For compounding to occur you will need to not spend any of your savings so next month interest is paid on the initial £100 + the £10 earned.
Compound interest on debt
For debt this means interest is charged on the debt plus any other interest charges which were charged in the previous months.You should pay off the debt as soon as possible as this can spiral out of control.
Credit cards should not be used for long term borrowing. Cheap goods will end up costing way more if paid over time with a credit card.
Credit Card Fees
Watch out for all the fees your credit card provider will try and charge you. This should be included in your contract and should be clearly identifiable.