All you need to know about cards – Credit and Prepaid Credit Cards

This article is designed to help customers understand the different types of cards available on the UK market and to help you understand the important fundamentals when considering any card.

Cards are a more convenient and safer alternative to carrying around large amounts of cash and the chip and pin device that many have offers extra security. Almost everyone in the UK will have a card of some type usually either a credit or debit card and they are probably one of the most popular financial products in the world. Cards are often referred to as ‘plastic money’ and they have worldwide acceptance. You can use them to make purchases in shops, online, over the phone, in restaurants and to withdraw money from cash machines. It is hard to imagine a world without them.

There are lots of different types of cards to choose from. You should start by thinking about how you are likely to use the card and work out which one is best for your needs. Some questions you should consider include: Are you a student?  Do you need a card for your business? Are you a responsible card user? Do you have a poor credit history? Do you want to earn rewards as you spend? With most cards you will find there are age restrictions and you will find that you have to provide some identification to acquire the card. Your credit history will also be an important factor when considering the right card for you. Particularly with credit cards, your credit score will affect how much credit you are given. Unfortunately the lower your credit rating the higher the interest rates you will be given and vice versa.

Comparing cards is vital – As there are so many types of cards and providers all vying for your business you should take the time to find the right card for you. You should compare the main features of different cards and find the one that best suits your needs, looking into any additional offers and benefits. By researching your options online through easy to use comparison sites such as Which Way To Pay, you will find some of the best rates and terms on the UK market.

With a credit card you can make purchases without having to have the money to pay for it straight away. A credit card gives you the option to borrow money from the card issuer. When you have a credit card you are given access to a line of credit. Credit is a valuable and for some a necessary financial tool. Credit card issuers record each purchase you make and send you a monthly bill with every transaction listed. You then have to pay back the credit you spent plus the interest which is expressed as a yearly rate or Annual Percentage Rate (APR). Used correctly sometimes credit cards can work out cheaper than a loan.

Use it properly and a credit card can help you establish a credit history, purchase items easily and even take advantage of the benefits and services offered by credit issuers. Credit cards only help you build your credit history, so long as you use the card properly. Having a credit history is essential if you want to apply for loans in the future because lenders look at your credit rating to determine your creditworthiness. Low credit scores and poor credit reports can cause lenders to charge you higher interest rates and make it more difficult for you in the future to apply for loans and lines of credit.

A valuable advantage of a credit card is that you get increased protection as opposed to debit cards. Not only are your purchases better protected you are also better protected against fraudulent activity. When you apply for a credit card there is no guarantee that you will be approved for a high credit line. The company can, and often will, give you a lower credit limit than that advertised and you may also not qualify for some offers that you find. The credit card agreement is essentially a contract between you and the card issuer. This includes the credit line and limit which is the total amount you may use.

-          Manage your credit properly. If you fail to manage your credit properly you will have to deal with increased interest rates. You shouldn’t buy things that you can’t pay back because you risk ending up in debt and damaging your credit score. When you don’t pay the money you borrow you risk being denied future credit.

 -          Always pay your bills on time. You should at least pay the minimum amount due every month and where possible pay charges in full. The minimum monthly payment is the lowest amount that you are required to pay the card provider each month. You will be in default if you pay less than this.  Please be aware that you will be charged if your payment is late.

 -          Introductory rate. Be careful with introductory rates. Although you may be offered an introductory rate that is very competitive, this can be a temporary rate that will end. Make sure you know what the rate will be after the introductory period is over because it could dramatically increase.

 -          Annual/Monthly fees. You may find that some cards especially reward cards, charge annual or monthly fees.

 -          Exceeding your credit limit. You will be charged for going over your credit limit. If you do need an increase you should contact your card issuer to see if they will allow you to exceed your limit. They will not necessarily agree to this.

 -          Cash Advances. When withdrawing money from a cash machine with a credit card this is called a cash advance. Be prepared that you may be charged for this.

 -          Additional Charges. You could be charged for requesting copies of statements and other administrations requests. There may also be application processing fees.

 -          Read the agreement carefully.  Once you sign the agreement between you and the card issuer, this becomes a legal contract. Therefore, always read the terms and conditions thoroughly and don’t be afraid to ask any questions.

 -          Do not borrow your way out of debt with a new card.  If you are having financial difficulties do not take out a credit card. You risk increasing your debts and not reducing them.

 Those with a poor credit history may struggle to obtain a standard credit card. However, there are credit cards out there solely designed for people with a bad, little or no credit. You are likely to get accepted for one of these cards whatever your financial past and these cards work exactly the same as a credit card. You can also use these cards to help rebuild your credit score thanks to credit rebuilding facilities, an aspect you should consider when comparing products.

The main disadvantage of bad credit credit cards is that because you are deemed more of a risk by the card providers due to your credit history you will find the interest rates are higher, sometimes considerably higher, compared with traditional credit cards. You will also find that you are given a lower credit limit because of this reason. Having said this, if you use the card correctly, making your payments on time every month, you will increase your credit score which will improve your future chances of borrowing and is likely to result in you being granted a lower interest card with a higher credit limit.

These cards are great for heightened user control and are a great alternative for those who do not want to take on the risks of credit cards, such as people with a bad credit score or those who are too young for traditional credit cards. Prepaid credit cards as they are sometimes called, can be used in the same way as a credit card except you are not being given any credit. You load the cards with funds and when this runs out you simply reload it to use it again. Because you are only spending your own money there are no interest charges. However, you may find there can be initial fees to buy and load the card, but this is not always the case.

Because you are not borrowing any money there are no credit checks involved so almost anyone can get one. They are ideal for those of you looking to avoid getting into debt and for staying in control of your finances because you are in complete command over your funds. Furthermore, if your card gets lost or stolen, your remaining balance will be transferred across to a new account and you will receive a replacement card.

Business credit cards are ideal if you want a way to separate your business and personal expenses. Whatever the size of your business, whether you are just starting out or are already an established firm a business credit card can add value to your company by  helping you to effectively managing your corporate finances. Some cards also come with some really beneficial extras such as offers on travel expenses, discounts on travel insurance and even cash back reward programmes. If several employees require cards you can also get multiple credit cards attached to one account.

If you are a student there are credit cards especially designed for you. These cards come with specially features to help you while you are studying at university including no annual fees and interest free periods. You will find with these cards, because as a student you are unlikely to have any credit history or the security of a regular income, you are considered to be more of a risk. With this in mind you will find that you are given a significantly lower credit limit compared to other cards and interest rates may be higher. However, these cards can be used to start building a credit history and using the card well mean in the future you are more likely to be given a card with better interest rates and a higher credit limit.

You can earn rewards on your purchases with a reward credit card.  Just by spending you can earn points that you can exchange for vouchers and discounts. If you plan to use your card a lot then credit cards with cash back programmes where you earn cash on your purchases could be the right type of card for you. For travellers, there are also some great cards that can offer a wide range of travel-related benefits including air miles, free hotel stays and more. The right card for you will depend on what sort of rewards you want to earn.

These cards are best suited to those of you who pay their credit card bill in full each month and for those of you who won’t be enticed to spend more purely to earn the rewards. You may find that there are annual or monthly fees attached with this type of card. When you are comparing the overall value of the card make sure that the card’s benefits and reward programmes are worth any annual or monthly fee.