Credit Cards

Credit cards, commonly referred to as “plastic” are an extremely common method of purchasing goods and services all over the world. In its most basic form, a credit card allows the buyer to make purchases on a “buy now pay later basis”; the credit card company makes the payment for the goods and the buyer pays the credit card company back following the receipt of a bill/statement. The card holder can then either pay off the balance to the credit card company, or make a minimum payment (usually a percentage of the balance) and the credit card company will charge interest on the outstanding amount on the card holder’s account.

A credit card effectively enables the card holder to make large purchases, and then make payment for them over a period of time, in instalments to the credit card company. The credit card acts as a facility for short term lending, benefiting the card holder as he or she is able to access funds with applying for a loan or using cash from a current account or savings, and benefiting the credit card company as it is able to charge interest on purchases, thereby making a return on their “loan”.

As credit cards become more popular and their availability more widespread however, there is now fierce competition between different card companies to attract customers. Consequently, the majority of credit cards now offer additional incentives to the customer, beyond purchasing power on credit. Incentives can range from lower interest rates, periods of interest free credit, insurance for goods bought, cash back, and loyalty points schemes.

Choosing the Right Card
It is important to take certain factors into consideration when selecting a credit card. Credit cards offer a service but the privilege of using this service is paid for. It is therefore essential to first assess how you intend to use the card, allowing you to choose a card that fits in with your spending and repayment habits, thereby minimising the actual cost of usage. Some examples of how your decision might be influenced follow.

If you are intending to use the card regularly, but to always clear the balance in full each month, then it is probably best to choose a card that has no annual fee and a good loyalty scheme, allowing you to earn points, rewards or cash back. You should also ensure that the card has an interest free period (e.g. 59 days) so that you are not paying interest in spite of clearing the balance.

Alternatively, if you are likely to be a regular spender and will usually but not always clear the balance in full, then it may be better to choose a card that has low interest rates, for the times when you leave the card with an outstanding balance. Choose a card with no annual fee, and if a loyalty scheme is available, weigh up the pros and cons of a card with a reward scheme versus a card with a low interest rate.

If you are likely to be a regular spender that rarely if ever clears the balance, it is important to choose a card with a low standard interest rate, and also continue to look out for cards offering longer term interest free balance transfer deals. It is essential to remember that credit cards are useful, but are also a means of falling into debt. You should never disregard the practicalities of making repayments to the card or the costs of running the card itself. If you are planning on using the card abroad, check the interest rates and fees if any for overseas usage.

Applying for a Credit Card
Having researched what type of card is best for you, an application form can be completed. In most cases, the form itself is fairly straightforward, but do remember that this form is used as the first step of a credit check. A credit card cannot be allocated to an applicant without the applicant passing a credit check, which will take into account the applicant’s credit status through credit history, address, and income. In many cases, if an applicant fails to be given a card due to income, a card with a lower credit limit, and different conditions will be offered. E.g. if the applicant is not suitable for a platinum card, a gold card may be offered instead.

It is always advisable to be aware of the cost implications of a credit card, and there are many online resources available to compare card types and offers according to the needs of the applicant.

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