Part I: Interest Rates And Fees
Unless you plan to repay your credit card in full each month, the rate of interest you will be charged on your outstanding balance will need to be one of the most important things you consider before applying for a credit card. That said, it is possible these days to disguise the real rate of interest that you pay on you credit card. The reason why this is the case is because although UK credit card providers are required, by law, to display the APR they charge on their cards, they do not need to include a variety of additional fees and costs in the calculation of APR. Consequently, it is possible to display a lower APR than other credit card providers’ do, but to include joining fees and annual membership fees, which other credit card provider do not do. This way, your headline interest rate looks lower, but your cumulative fees and interest are actually higher.
Fixed rate vs. Variable rate interest
Although most credit card providers in the UK are required to display their APR, in most cases APR is a variable rate, thus subject to change at any time – provided appropriate notice of such is given. As a result, if you are prudent and knowledgeable about such things, and believe interest rates may vary over the period of your credit card debt, you may try to fix your credit card interest period for a fixed term.
Keep in mind, however, that fixed interest rates can run counter-productive if variable interest rates fall below that of your fixed interest rate. As such, if you find a UK credit card provider willing to offer you a fixed rate of interest, at the back of you mind you should be asking yourself why this is the case.
That said, an exception to the fixed rate vs. variable rate debate can occur if you already have a credit card and are looking to transfer you balance to a new credit card provider. In such a case, it is possible to fix your credit card interest, usually for an initial period of 6 months, at extremely low and attractive interest rates – as part of an introductory offer. If this happens to be the case, you still need to check and make sure that:
- you do not lose the introductory offer if you default on any monthly repayment during the period of the introductory offer, thus making the interest rate revert to the normal rate, which may be higher than you were previously paying;
- the promotional low rate of interest applies to the whole of your outstanding balance, and not only to ‘new’ items you charge to your credit card after you have transferred the balance, with the transferred balance accruing interest at the normal APR
- you will not be charged a penalty payment if you decide to transfer your balance to another credit card provider either during the promotional period, or shortly thereafter.
If any of the above does not hold true, you may find that it works out cheaper to remain with the credit card provider you currently have.
Penalty Payments
Penalty payments are a major pain with having a credit card. Normally you would think that there is little or no chance you will be charged a penalty payment for using your credit card. However, unless you read your credit card terms and conditions carefully, you may find you end up having to pay any one or more of the following penalty fees:
- late payment fees: levied against you for failing to pay your monthly minimum repayment on time
- ATM fees: levied against you if you make a cash withdrawal using your credit card – especially so if you use your credit card overseas!
- ‘out of area’ fees: rare, but sometime levied against you if you use your credit card overseas
- You also need to know that all of these penalty fees do not include any penalty interest you may be asked to pay for having incurred the penalty event.
As a result of the above, carefully reviewing your
credit card statement each month to see both what has been charged to your account and what fees and interest has been charged is of paramount importance. Don’t just briefly skim the statement and hope all is okay, because if you do not object to any entry within the allotted time for doing this, this means you agree to the charge that has been made!
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