Credit Cards can be extremely handy if used carefully, but they can also be very dangerous.
What are Credit Cards?
Credit cards are essentially just another form of borrowing money. They are offered by most banks, building societies and high street stores, and will be issued with a credit limit.
How can I use it?
Credit cards works in much the same way as a debit card, but instead of spending money you already have in your account, you spend money that is lent to you, in the form of a credit limit.
Each month, credit cards issuer will send a statement to the user, requesting at least a minimum repayment (usually 5%) and will charge a preset rate of interest on the outstanding balance.
If the user pays off the balance in full each month, they will never pay any interest.
Types of Credit Cards
There are hundreds of different credit cards, but most will either be VISA, Mastercard or American Express, which are issued by hundreds of different providers. Most credit cards will not charge a fee for use, though as some do it is worth checking all the facts before going ahead.
How do the Credit Cards companies make their money?
Credit cards companies make their money in a variety of different ways. They will charge the user interest on their outstanding balance, often by tens of times the Bank of England’s base rate – so effectively, credit cards companies lend money at a very high interest rate.
They also charge users for withdrawing cash, transferring the balance from one card to another, and in some cases a monthly or annual fee.
Best ways to take advantage of a credit card
Credit Cards often offer rewards for using them, including vouchers, cashback or points schemes. Users who can afford to pay off the balance in full each month will benefit from the rewards, and escape paying interest back to the company.
Those who borrow money on credit cards which they can’t repay will get a worse deal, as they will pay inflated interest on the money borrowed, and will have been better off with a traditional loan.