If you are thinking of getting a credit card it’s important you’re aware of the financial jargon used in the terms and conditions and credit card statements so that you can make informed and responsible decisions. By taking a minute or two to familiarise yourself with these credit card terms, you’ll be able to avoid common credit card mistakes and use your credit cards to your advantage.

1. Minimum Payment

The minimum payment is the smallest amount of money that you must pay back on your credit card each month to avoid late fees and charges. ⁣Ideally, you should pay off your credit card in full each month to avoid paying any interest. However, if this is not feasible, you should still aim to pay off more than just the minimum payment. If you only pay the minimum payment, it will take a very long time to clear your debt and you’ll keep racking up interest. ⁣

2. Credit Limit

Your credit limit is the maximum amount of money you are allowed to borrow on your credit card. The amount is determined by your credit card issuer using your credit history and application information. ⁣

3. Credit Card Balance

Your credit card balance is the total amount of money you owe the credit card company. When you make a purchase on your credit card, your credit card balance increases. When you pay off debt on your credit card, your credit card balance decreases. ⁣
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Don’t confuse your credit card balance with your available credit. Your available credit is the amount you have available to spend on your credit card. Your available credit is your credit limit minus your credit card balance.⁣

4. Utilisation Rate

Your utilisation rate is your credit card balance divided by your credit limit. This is also referred to as your utilisation ratio.⁣ Experian recommends keeping your credit utilisation rate at 25%.

5. Grace Period⁣

The grace period is an amount of time where you are not charged interest for any purchases.⁣ Aim to pay off your credit card balance in full before the grace period ends. ⁣

6. Annual Percentage Rate (APR)

The annual percentage rate is the annual interest rate you’ll pay on your credit card if the balance isn’t paid in full each month.⁣ APR is useful for doing a like-for-like credit card comparison.⁣

7. Late Payment

A late payment is a credit card payment made after the grace period.⁣If your credit card payment is late, you’ll incur late payment fees. Any introductory offers (e.g. 0% for x months) may be withdrawn. In addition, a late payment will show up on your credit report and could have a negative impact on future credit applications.⁣

8. Balance Transfer

A balance transfer is when a credit card balance is moved from one credit card to another credit card.⁣ A balance transfer to a credit card with 0% interest for a specified number of months can help you pay off debt quicker, as you are no longer paying interest. There is normally a balance transfer fee which is added to your total debt, so it’s worth factoring that into your decision. ⁣

9. Section 75 

Section 75 of the Consumer Credit Act is a piece of legislation which means credit cards provide an additional guarantee of reimbursement if the goods acquired are faulty, provided the cost is between £100 and £30’000. ⁣It also provides protection against companies which go bust and cannot provide the service you paid for. For example, if you booked a holiday with Thomas Cook and they collapsed before your holiday, your money would be protected under section 75.⁣

⁣Our thoughts on credit cards

Remember credit cards are neither good or evil they’re merely a tool, and like all tools they can be used for good or evil purposes. Use credit cards irresponsibly and you could run up debts and ruin your credit score. Use credit cards wisely and you could build your credit score and increase your lending options.
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The 2 types of credit card customers

Credit card customers can be grouped into 2 categories: revolvers and transactors.

Revolvers are people who don’t pay off their credit card balance in full each month, and end up paying large amounts of interest on unpaid balances. ⁣The smaller your monthly repayment, the more you’ll pay in interest and the longer it’ll take for you to clear your debt. The aim is to make compound interest work for you, not against you.

Transactors, also know as non-revolvers, or deadbeats, are customers who take full advantage of the interest-free period and pay off their balance in full every month.⁣

References

1. Improving Your Credit Score by Experian

https://www.experian.co.uk/consumer/guides/improve-credit-score.html
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