The Real Costs of Credit Cards

Introduction

There is no getting away from the fact that credit is now more widely available than ever making it simple to use a plastic credit card to make purchases. What isn’t so straight forward are the costs associated with using credit cards. This article attempts to provide an overview of these costs to help inform your spending decisions.

1. APR

How often do you choose the first Credit Card you see or the most popular one? What most people don’t realise is that it pays to shop around and yet we rarely do. Some credit cards charge higher rates than others which will have a major impact upon your finances, especially if you don’t pay your bill outright at the end of the month.

If I told you that a top of the range television was for sale for £2,000 but that just down the road you could get it for £1,800, most people would quickly choose to save £200. In essence this is exactly how much of an effect choosing the right credit card can have on your finances, in relation to interest payments.

Annual Percentage Rates (APR) is the means that Credit Card companies use to charge you interest. These can vary substantially from company to company but they range between 15-25%. Ensure you choose a card with the lowest possible APR and don’t just accept the first one available.

It should also be noted that credit card companies often charge a higher interest rate for cash withdrawals via your card so read your small print and don’t presume it is the same APR rate.

2. International Charges

Using your credit card in another country is often promoted by finance companies as one of the key benefits of their product and yet they often fail to explain the costs involved.

If you use your credit card outside your own country you are liable to pay an additional charge for the privilege which varies from company to company but is usually between 2-5% of the transaction cost. So buying that Ming Vase on a trip to Europe may be more expensive than you think. Credit card companies claim that it is the cost of processing these transactions in another country, but this doesn’t hold up well given that most big credit card firms are likely to have offices based in most countries, that could easily process the transaction with limited effort.

3. Balance Transfers

A word of warning about the costs of balance transfers. These were introduced to entice customers to a different credit card company. The company offers you between 6-9 months of 0% interest on your existing debt in exchange for you changing to their credit card. This is hugely tempting for many people however there are some pitfalls to it.

a) You will only get 0% interest on your existing debt. Some people wrongly assume that they will not pay interest on any new spending on their credit card for the 6-9 month period but this is incorrect.

b) Always check the interest rate that your card will revert to after the balance transfer period, as it could be that it is higher than your current credit card provider meaning that you pay more interest in the long term.

4. Late Fees

Late fees are also associated with credit cards if you fail to make at least the minimum payment required each month. These can vary but usually come in at around £30.

5. Over Limit Fees

These are fees that you will be charged if you go over your credit card limit without agreement. Most companies will charge you a 1.5% handling charge for this.

Summary

This article has sought to provide an overview of credit card costs and the direct effect these can have on an individual. Attention has been given to the vast differences in APR rates and the use of international charges and balance transfers. Finally we have examined costs linked to late payments and the consequences of going over an agreed credit limit.

More Financial Planning Information available at http://www.friendsandmoney.co.uk/financialplanningarticles.html