All about Credit Cards

The term 'credit card' is perhaps misleading as they are 'debt cards' after all, they allow you to use money you don’t have, and which you need to pay back.

Used wisely, a credit card can be great for day to day use as well as life’s little emergencies.

How do Credit Cards work?

A credit card lets you buy things using credit, there is normally a pre-set limit. The amount you can spend on your card will depend on your credit score, and the amount your card provider is prepared to extend to you.

By paying the outstanding amount on the card each month, you will avoid paying interest for the amount you borrowed and at the same time you will be improving your credit score. However, if you do not settle the amount outstanding you will be charged interest, the amount will depend on your arrangement with the card provider.

Most cards also come with a budget facility that allows you to buy larger items and pay them off over a fixed term, which you decide on. Although you pay interest on these budget transactions this is still much better than a loan because you eliminate costly initiation fees and monthly service fees on the loan.

What are the pros and cons of credit cards?

Using a credit card has a number of advantages. Some credit cards do not charge a monthly fee and there are never any transaction costs on the credit card whenever you make a purchase. You also do not need to fill out forms and wait for a decision if you want to use the credit. Lastly you get free credit from the date that you make the purchase until the date that payment is due.

Credit cards are however dangerous because it requires self-discipline not to spend on things that you do not really need. Although you are only required to pay the minimum installment, which is usually the budget installments plus between five and ten percent of the outstanding balance, if you do not pay the full amount then you are charged interest.

How is interest calculated on a credit card?

Interest is calculated on the daily outstanding balance from the date of the purchase or cash advance. If you settle the full amount each month then you pay no interest.

Tips for using a credit card

• Pay your card in full every month.

• If you use a card for new borrowing, remember it's a debt so don’t use it as an excuse to overspend.

• With a card that pays you to spend with a loyalty program, you must pay the full balance to avoid interest which can dwarf any gains.

• You start paying interest immediately usually at a higher rate, when you withdraw cash from your credit card or use it for a transaction which is treated as a cash transaction, such as paying a utility bill, buying travel money and travellers' cheques, buying gift vouchers, betting or gambling (including lottery tickets and most transactions in a casino). You may also be charged a cash withdrawal fee.

What should I do if my credit card application is declined?

Your credit history is a major factor in determining if your application will be accepted. Lenders will use your score to judge if you’ll be able to repay debt on a card.

You may be asked to pay a higher rate of interest if you are seen as a higher risk.

If your application is declined, you need to find out why you have been declined before applying for another credit card. Contact the provider, By law they must give you the reason. Once you know the reason you can work on fixing it.

It is important to know why your application was declined, as you may have been a victim of cyber fraud or identity theft