Getting your first credit card can feel like a transitional experience: either adulthood or getting access to very flexible finance. Indeed, they can offer you some assistance with establishing a useful line of credit.
When looking at your new card you may wonder why regardless of the card provider, or your credit limit, it will almost always have either `Mastercard` or `Visa Credit` branded on it as well as your lenders name. These two are `types` of credit cards and most financial institutions (such as banks and specialist lenders) who offer credit cards will use one of these network operators. Basically your lender provides the money you borrow, the network enables you to use the card worldwide and charge the lender for that privilege.
So you are all set to go on a spending spree! - book a holiday, refresh your wardrobe, buy a huge television and paint the town red… Just hold back for a moment and be fully aware of the pitfalls first.
Any borrowing on your credit card will often be subject to some pretty hefty interest rates (even after an interest free period they will then kick in). Rates are usually in the range of 14.9% to 39.9% per annum. This soon mounts up over time. Therefore using a card should be considered carefully, ensuring your credit card debts do not escalate out of control. If you`ve got your first credit card or are about to apply, below you can read about the four basic credit card slip-ups to avoid.
Borrowing on credit cards comes with a serious obligation to meet the required payments on time every time. One stumble, such as skipping a payment, will put your card into arrears. Your card conduct is visible to other lenders when you apply for credit and affects your credit score. So getting in trouble can have a genuine and enduring impact on your credit worthiness. Arrears will be visible on your credit report for between 2 and 6 years. Major arrears will usually result in a default / delinquent account being recorded on your credit file for 6 years, this is a major red flag to just about all lenders.
Before you spend work out what the payment will be ready for when the bill is due. Set aside more than that amount so you are ready to meet at least the minimum repayment in full.
Credit cards can get you stuck in an unfortunate escalating debt scenario. By giving you the capacity to purchase far and wide right now and not pay until later, it is very easy to spend large sums in a short period of time. The actual balance you have accrued may come as a bit of a shock when the bill comes.
The statement will show you the total balance owed, the minimum payment required and when this is due. If you pay by direct debit your lender will usually only take the minimum required automatically. The problem is that most of this payment may just cover the interest, so your debt has hardly reduced. This can lead to you paying a lot of interest back over a long time. For example if you borrow £1,000 on a card at 29.9% APR and only pay the interest, in the first 12 months you will pay circa £300 in interest and yet still owe the original £1,000.
If you can settle the full debt amount without getting into cash flow issues then do so. Otherwise contact your provider and set a higher `minimum` payment each month that is higher than the lenders calculated minimum but still affordable to you. Then check your balance is actually going down by at least 10% per month. If it isn`t, then increase your payment again and stop using the card until the balance is right down.
Credit card agreement terms and conditions are extensive and can be loaded with confounding dialect (the dreaded jargon),that might be difficult to comprehend for new card holders or those inexperienced with credit. Many are just focused on what to spend the money on rather than grasp the wider cost implications of their actions.
In any case, it is critical to peruse the fine print to really comprehend what you’re getting yourself into. Ensure you fully understand the card charges. Focus on: the actual interest rate, when any free period ends, which purchases are interest free (often cash advances are not),foreign transaction charges and of course late fees / penalties. If in doubt ask for clarification before you use the card.
Credit cards can be awesome devices for short term financing of a purchase you can`t afford to buy but need. Plus they do help to build up a credit profile and show future finance and mortgage providers you are financially sound by managing the credit line properly.
New charge card holders ought to start of gradually, spending on what they actually need rather than desire. Always ensuring you can bear the cost of the minimum repayment plus at least 10% of the balance. Be wary of accepting increased credit limits from your provider. Managing your card with a typical starter limit of circa £2,000 is totally different to coping with a debt of £5,000 to £10,000 or more, when the interest payments can get very large very quickly.
If in doubt, put it on hold.
If you take heed of these common issues and keep on top of your debts your credit card can give you years of useful finance, enabling you to cash flow important purchases. But credit card providers are not charities, they charge you for their services, so most things you buy are going to actually cost a lot more. Simply ask yourself, do I really need to buy this right now and is the actual gain it provides worth the extra cost?
My Sort of Loan has come across a multitude of clients who simply find themselves with too much credit which is making it difficult to meet all the repayments and have any money left. There are various avenues to explore here, such debt counselling and help through citizens advice or charities such as step change.
Some of our clients look into the option of a debt consolidation loan to settle their credit cards by taking out a larger loan spread over a longer term to help their cash flow. . Our debt consolidation finance allows you restructure your credit card debt and create a repayment plan that will give you an end date to when you are debt free. This is not the right rroute for everyone and if chosen the borrower needs to ensure they don`t ramp up their credit again. Consolidating debts in this way will usually mean you pay back more over the term than you would have if you had paid your cards down earlier.