Credit Cards / Store Cards Advice
Credit Cards
What are credit cards?
A credit card is nothing more than a way of borrowing money. To
get a clear picture in your mind of what a credit card is, re-name
it a ‘DEBT CARD’.
Credit card companies are set up by banks, building societies
and other financial institutions. Then they employ other firms like
Master Card and Visa to handle most of the administration on their
behalf. Why? Because the interest banks make on credit card debt is
3 times the interest they make on your average bank loan.
Quote ‘I don’t borrow on credit cards, because it is too
expensive,’ - Matthew Barrett the former head of Barclays bank.
Should you use them?
The UK Cards Association is the trade body and public voice of
the card payment industry. This is what they have to say about the
benefits and risks of using a credit card:
Benefits
- Free, short-term credit as long as you always pay your balance
in full by the due date shown on your statement.
- A safe and convenient way to pay for goods and services,
particularly over the Internet, by phone or by mail order, from
businesses both in the UK and abroad.
- Protection against fraud — if you are the innocent victim of
fraud you will not be expected to pay if a criminal uses your
card.
- Incentives for using a card such as loyalty points and cash
back, or payments to support a charity.
- A truly global currency, as credit cards are accepted in
virtually every country around the world.
- Perhaps the most flexible and convenient way of borrowing money
in the short term.
Risks
- Lead to unplanned levels of debt.
- Incur charges if you make late payments, miss them altogether
or go over your credit limit.
- Damage your credit rating if you continually make late payments
or miss them altogether.
- Cost you more and take you longer to pay off than the
alternatives, particularly if you only ever make the minimum
repayment.
- If you have more cards than you need it could make it difficult
to manage your finances.
A credit card is a convenient short-term way to borrow money,
often offering a period of interest free credit. But if you’re
thinking about borrowing money for more than a few months then you
might want to consider a personal loan.
Remember that you have to pay back what you borrow. Think about
what you need credit for: is it a luxury or a necessity?
Credit is not free money: the golden rule is that if you can’t
afford to make repayments on your debt then you should not be
borrowing at all. Used sensibly, credit cards offer many benefits,
but used irresponsibly could pose some risk.
Find out more about credit cards at theukcardsassociation.org.uk
This is what Martin Lewis (Money Saving Expert) has to say in
his book ‘The Three Most Important Lessons You’ve Never Been
Taught’
‘‘If you want to admire innovative money-making genius, take a
look at credit card minimum repayments… Like a shark, they’re
deadly but beautiful.
One of the most ingenious money-making schemes ever devised by
mankind is the credit card minimum repayment system. You have to
admire the companies for thinking this one up, because it truly is
outstandingly profitable: but most people don’t notice it!
Remember, with credit cards you are in control of the
repayments, and all you have to do each month is meet the minimum
amount they’ve set. This is usually around 2% of the total debt, or
£5 (whichever is the greater).
Here’s the secret of minimum repayments.
Because the minimum repayment is set as a percentage of what you
owe, the actual sums you pay back with your monthly minimum
repayments naturally fall as what you owe decreases.
So, actually, the amount you repay only just covers the interest
on the card, meaning you’re hardly repaying back any of the
original amount you borrowed. Clever, innit?
Credit card companies designed minimum payments to trap you into
debt for the rest of your life. They want to see you take forty
years to pay it off as that way they earn a mass of interest and
you’re permanently in debt to them.’’
Check out his website MoneySavingExpert.com for
his Minimum Repayments Calculator and his 3 step solution to the
minimum repayments trap.
Store Cards
Storecards are a form of credit card, with all the risks of a
credit card, but few of the benefits.
- You are restricted as to where you can use them
- The interest or APR is higher
Many shops actually make more from the interest on store cards
than they do in profit from selling their goods. They deliberately
target young people who are inexperienced, tempting them into
borrowing before they really understand what it means. Once you
have a debt of £1,000 on a store card, the shop could be making
£250 a year off you in interest alone.