UK Credit

How do credit cards work? – Forbes Advisor UK

Credit cards can be useful tools for managing your money better. But how exactly do they work? We get back to basics and explain everything you need to know.

What are credit cards?

Credit cards allow you to pay for goods or services up to a certain limit, known as a credit limit. Essentially, every time you spend on the card, you are borrowing from your card provider. You must then repay the borrowed amount (your “balance”) in monthly installments.

Credit cards are issued by banks and other financial providers. There are several types of credit card, each designed for a different use.

For example, credit cards with balance transfer allow you to transfer debt from an existing card, while purchasing credit cards allows you to spread the cost of new spending over several months. In either case, if you choose an offer with a 0% promotional window, you will not have to pay any interest for the period indicated.

Other options include reward credit cards that allow you to earn cashback, loyalty points at certain retailers or supermarkets, or airmiles.

There are also credit cards designed for applicants with low credit scores, as well as travel credit cards that do not charge a fee for use abroad.

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Are you paying interest on a credit card?

Credit cards have what is called a “grace period”. During this period, you do not have to pay interest on your purchases. The grace period is simply the time that elapses between the date of purchase and the date your payment is due. And if you clear your balance before the due date, no interest will be charged.

Many card providers set a grace period of 56 days from the start of your billing cycle. But it can be shorter, depending on the card and the provider.

Your provider must send you your monthly statement (invoice) showing you how much you owe at least 21 days before your payment is due. In most cases, you should receive your invoice 25 days before.

So how does this work out in practice? Suppose your billing cycle is July 1 through July 31, and your grace period is 56 days. This means that your grace period will run until August 25 (31 + 25 = 56). If you pay off your balance before this date, no interest will be charged. But if you carry a balance, interest will apply.

Note, however, that each purchase does not have its own 56-day interest-free period. If you made a purchase on July 20 or July 31, for example, it still falls in the same billing cycle and must always be refunded by August 25. In other words, you would have 36 days and 25 days, respectively, without interest.

Also note that if your credit card has a separate 0% promotional offer, the grace period will not be relevant as you will have until your 0% offer runs out to pay off your balance before the interest runs out. are invoiced.

What is included in your monthly statement?

Your monthly statement will tell you:

  • A list of transactions since your last statement
  • A breakdown of the amount owed (your balance)
  • Details of interest and other charges on the account
  • The date you should have made your payment
  • The minimum payment amount
  • Details on how to make your payments

What is the minimum monthly repayment?

The minimum monthly repayment is the lowest amount you need to repay each month to avoid additional charges, such as late payment fees. Typically, you will have to pay 1% of your balance, plus interest for the month, or a fixed sum of £ 5, whichever is greater.

Because the minimum payments are set so low, it’s always best to pay more if you can. Paying off only the minimum will dramatically increase the time it takes to pay off your debt, and you’ll pay more interest in the long run. If you can afford it, it’s always best to pay off the full balance each month.

Your payment date will usually be set for you, but you can usually ask your provider to change it to a date that better suits your needs, such as a few days after receiving your pay.

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How do you pay your bill?

Depending on your card provider, you may be able to pay your in-branch bill by check or cash, over the phone, or through online or mobile banking. However, one of the best ways to pay your bill is through direct debit. You can create one in an agency, by phone or online.

Direct debits can be set up to reimburse only the minimum, the total statement balance or an amount defined by you. This will ensure that you never forget to make a payment and you won’t be charged any late payment fees that can impact your credit history.

What fees might be due?

Below is a list of the types of fees you might be charged with a credit card:

  • Late payment fees – if you are late or miss any of your monthly payments (or pay less than the minimum) you will be charged a late fee of around £ 12.
  • Charges for exceeding your credit limit – if you exceed your credit limit, you will usually be charged a fee of around £ 12.
  • Cash withdrawal fees – if you use your credit card to withdraw money from an ATM, you will be charged approximately 3% of the amount withdrawn. You will also be charged interest from the time you withdraw your money until you pay off the balance in full. It is always best to avoid withdrawing money from your credit card except in an emergency.
  • Balance transfer fee – if you transfer a balance from one card to another, you will probably be charged a transfer fee. This is about 2% to 3% of the amount you are transferring.
  • Foreign operations – if you use your card to spend abroad, many cards charge an overseas transaction fee of around 3%.
  • Annual subscription – some credit cards, especially those that offer rewards and other benefits, charge an annual fee. It can vary but can range from £ 100 to £ 250.

Where can you use a credit card?

You can use your credit card in most stores and supermarkets, as well as for shopping online. You can also use your credit card to withdraw money but as mentioned it can be expensive and best avoided.

Your credit card will use either the Mastercard, Visa, or American Express payment network. American Express is less widely accepted, but most retailers accept Mastercard and Visa. That said, Amazon recently announced that it will no longer accept Visa credit card payments from January 19, 2022, due to the high cost of payments.

You can pay for goods and services with your credit card just like a debit card. Either you will be asked to enter your PIN code, or you will be able to make a contactless payment. The current credit card limit for contactless payments is £ 100. To see if your card has the contactless feature, check to see if it has the wave-shaped symbol consisting of four bold lines on the front of the card.

Can you link your credit card to your phone?

Yes you can. Mobile payment services like Apple Pay, Google Pay, and Samsung Pay all allow you to link your credit card to your smartphone so you can pay for goods and services by tapping your device on the contactless card reader. You don’t even need to have your card with you.

To register your card, you will need to either open the Wallet app on your iPhone or download the Google Pay app from the Google Play Store if you have an Android phone.

If you want to use Samsung Pay, you can download it from the Samsung Galaxy Store. You will need to add your card details and then you will receive a verification code from your bank. You will then be ready to go.