Credit cards

Credit cards are a form off flexible borrowing that gives you the freedom to buy things now and pay for them later, up to an agreed credit limit and subject to terms and conditions. They are an alternative means of payment that avoids the risks of carrying large amounts of cash.

How does it work

With a credit card, you're able to decide how much you spend, how much you borrow (up to an agreed limit) how long you borrow for and how much you will repay each month, between the minimum repayment up to the whole amount.

You can use your credit card to buy goods and services, transfer balances from existing credit cards and for a fee withdraw cash and you'll get a statement each month showing how much you've spent. You have to pay back at least the minimum amount shown on the statement each month. The card issuer will charge you interest each month on any money you still owe (the outstanding balance). Once the balance is cleared, you can spend up to your agreed credit limit once again.

Usually, you will find either a Visa© or Mastercard® symbol displayed on your credit card. Both Visa© and Mastercard® are international payment systems and there are no significant differences between the two. In practical terms, whichever symbol appears on your card, it simply means that you can use your credit card to pay for purchases almost anywhere, including shops, restaurants, garages, and the Internet.

To prevent fraud credit cards use a system called chip and pin.  Instead of signing a paper receipt at the till when you pay for something, you enter a four digit Personal Identification Number (PIN) on a card reader in the same way as using a cash machine.  The chip inside the card holds secure data and your PIN verifies your identity.

The key points

  • Paying off your full balance each month by the payment due date, means you pay no interest on your borrowing.
  • If you fail to make the minimum payment on your credit card, you may be stopped from using your card and this may affect your credit rating. If you feel your debt has got out of control the first thing to do is talk to your card issuer.
  • Check the small print on any offers and choose a card that will suit your needs, and when you are shopping around try and make sure you are comparing similar products.
  • Look beyond any initial promotional rate to understand what interest rate you will be paying on your card once the promotional period has ended.
  • Credit cards offer a variety of features such as promotional offers, cash back and loyalty schemes.
  • Credit cards are useful to take on holiday, as it avoids taking large amount of cash with you and provides you with a competitive exchange rate and emergency cash and card replacement. Advising your bank of travel arrangements is a good way to maintain extra security on your card, and they can also caution you on any fee or charges you may incur.

Glossary

The process of applying for a credit card may involve some unfamiliar words and phrases.  Here's a quick guide to some of the most common ones to help you.

AER

Stands for annual equivalent rate. This is the rate that is generally quoted as interest paid on savings and investments so that you can compare accounts. It is used to demonstrate what your interest return would be if the interest was compounded  (adding interest on to the balance then paying interest on the new higher balance) and paid annually instead of monthly (or any other period).

Affinity card

This is a credit card that has links to an organisation (usually a charity). When you open and spend on the card, the specific organisation will benefit with a donation. The Co-Operative Bank have over 12 charity cards including Amnesty International, Oxfam and Help the Aged.

ATM

Are 'Automated Teller Machines' which are often referred to as cash machines. You can access your money from an ATM at any time of the day. They also provide you with other basic services, such as balance enquiries.

Balance

This relates to the amount of money in your bank account.

Cheque

A cheque instructs your bank to pay a specific amount of money from your account to another person or organisation. You can also deposit cheques from other people into your account.

Credit

A payment into your account.

Credit limit

This is the maximum level of spending permitted on you card which is set by your credit card provider. If your over this limit you may incur charges and / or your card may be refused.

Credit scoring

This is the system that different banks, building societies and financial institutions use to decide whether they will provide you with a credit card and also to set the credit limit

Debit

A payment taken from your account.

Deposit

Money you put into your account.

Direct debit

This is an instruction from you to your bank or building society allowing someone to take money from your account. The amount of money taken can vary, but you must be told the amounts and dates beforehand. You can utilise Direct Debits to pay bills automatically from your account on a regular basis.

Fixed Rate

This is a form of savings account which will (in most cases) not allow you to access your money until the agreed term has finished.  The reward for this tends to be a higher rate of interest, which means you generally get more savings back.

Gross

The way interest is paid before any deductions e.g. tax/fees.

Interest free period

The time between when you buy something with your credit card, to the date when you need to pay your monthly bill.  This can be as much 45-50 days and is generally interest free. Therefore if you pay the full outstanding balance by the payment due date, you will pay no interest

Interest rates

Are important because they effect how much it costs you to borrow money and how much you earn on any savings you may have.  Borrowing becomes cheaper when the rate goes down and dearer when the rates go up.  Savings earn less when the rate goes down and more when the rate goes up.

Interest rate

The percentage rate that is paid on every £1 saved or borrowed with the bank.

Individual Savings Account (ISA)

Allows you to save money up to £3,600 in a cash deposit ISA without having to pay any further tax on your returns.  UK residents over the age of 18 each have an an allowance of £7,200 each year to save within ISAs.

Introductory rate

Some cards offer an introductory rate which is an APR that applies for a limited period of time when you take out the card.

Instant access

This is a form of savings account which enables you to have access to your money without delay.

Net

The amount of interest paid after deduction of income tax (or other fees).

Payee

When a cheque is made out, the person or organisation that it is made out to is the payee.

PIN

PIN stands for Personal Identification Number and it is the four digit security number you will use when you are taking out money at an ATM or making transactions using your debit card.

Secured loans

A secured loan is a loan where you are required to secure an asset which belongs to you, such as house or car as security against the loan, to enable the lender to balance out the risk of lending. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Sort code

This is a six-digit number that forms part of your account details and identifies a specific branch of the bank.

Standing Order

A standing order can be set up if you want to transfer a specific sum on a regular basis to another account. This can be used to make regular savings from a current account to a savings account.

Unsecured loans

An unsecured loan doesn't require any security to be provided, and is generally available for lower amounts over a shorter term.

Useful Links

Here are some useful links we find helpful and thought you might feel the same.

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