All plastic is not created equal. Although your debit card and your credit card may seem to work exactly the same way at the till, there is one enormous difference behind the scenes where you can't see it. When you swipe your debit card, you are spending money you already have. When you swipe a credit card, you are borrowing money that you'll have to repay. That leads to other differences - and explains why you have to pay to use one and not the other.
They are two very different animals. When you apply for a credit card, the issuer runs a credit check and makes a decision on how much money they're willing to loan you. That is your credit limit. It's not your money - it belongs to the company or the bank. In essence, it says that you are pre-approved to borrow up to your credit limit. When you use the card to make a purchase, you have actually borrowed that amount from the bank or lending company. At that point, you have a certain number of days to pay it back (by paying off your account). After that number of days, the company begins charging you 'interest' on your balance. Interest continues to add up (accrue) until you pay off the account. Usually, the interest is added to your account balance, and if it's not paid off within the payment period, you'll end up paying interest on the interest.
Does that sound complex? It is. Not understanding how credit cards work is one of the biggest reasons that so many people end up with spiraling debts. Knowing a few simple facts can help you make good choices when you apply and later, when you use your card.
- When you use a card, you are borrowing money. When you borrow money, you agree to repay it at the terms set out by the lender. Make sure you understand those terms when you apply. Your application is your agreement to abide by their terms if they approve you for a card.
- If you pay off your purchases within the grace period, you won't incur any interest. The grace period varies from one card to another, even within the same company. One of the things to check when you make your application is the length of the grace period. The longer the grace period, the more leeway you have in getting the account paid off before interest starts to gather on it.
- The amount of interest that you pay on your purchases often depends on your status with the card company. Be aware that the rate you see when you apply is not always the one that you'll be offered. Those are called ‘typical rates', and they're the best interest rate that the company offers for that particular card. At least two in three people that are accepted for the programme must be offered a card at those rates - but that means that one in three people will be offered a card at a higher interest rate.
- Late payments and missed payments will raise your interest rate. Most companies incur a penalty when you make your payments late.
All that said it important you compare offers from UK companies and find out the interest rates, grace periods and any special terms that may apply to you. Take the time to research before you apply for a credit card and you can save yourself a great deal of money and worry.
