CREDIT CARDS

Understanding Credit Card Cost And Charges

Choosing a credit card, particularly if you have never had one, can be daunting. You’ll be faced with a huge number of options. There are credit cards primarily aimed toward those seeking to manage debt; those ideal for low-interest purchases; others best-suited for use abroad.

Interest Rates

These can be confusing since there are different interest rates for different transactions. The most commonly specified interest rate is the one on purchases. Rates also tend to be different for withdrawals and similar transactions and for balance transfers. Some credit cards offer interest-free periods on either purchases, balance transfers or both. Interest rates are quoted in annual percentage rate (APR). This is the amount you’ll need to pay to borrow the money. But you’ll also need to take into account compounding interest, that is, interest you pay on the interest itself.

Withdrawal Fees

Credit cards rarely are suitable for withdrawing cash, due to rates for such transactions being significantly higher. Also, the interest usually is charged from the moment you withdraw the money, unlike purchases, when you’ll get a month or more of interest-free credit. Additionally, you may have to pay a cash-handling fee for withdrawals. The same rules generally apply to any other cash advances, such as foreign currency conversions. For such transactions, stick to your debit card.

Balance Transfer Charges

This refers to transferring the money you owe on one credit card to another. It’s done to take advantage of lower interest rates. Many credit card deals offer interest-free balance transfers, which allow customers to avoid paying interest on debts for a certain duration of time. The very best balance transfers offer up to 30 months interestfree. But such credit cards often don’t provide the best rates on purchases and other transactions. Also, remember such credit cards charge a fee for transferring the balance. Generally, the longer the interest-free period, the higher the fee will be. Balance transfer charges are a one-time fee that is a percentage of the amount of money being transferred.

Late Payment Fees

Credit cards have minimum monthly repayments, typically around 5 percent. While you should get into the habit of paying off as much of the debt as you can at the end of each billing period to avoid racking up interest, you should always be sure to pay at least the minimum, and on time. Late payments usually incur additional charges, and they can also reflect badly on your credit rating. To avoid late payments, set up a direct debit so the payments are made automatically and on time. If you prefer to pay your credit card bills manually, be sure to allow plenty of time for the transaction to complete.

Foreign Usage Fees

Most credit card providers charge additional fees when you use a credit card abroad, at least a commission charge. You’ll also need to take into account the exchange rate. Do not take for granted the exchange rates you see on currency converter websites — the banks all have their own exchange rates that are never as attractive as the official ones. Finally, withdrawing cash on a credit card abroad usually is a particularly bad idea. Most credit card companies charge you a foreign transaction fee in addition to the cash advance fee. On top of that, you’ll probably not be getting a good exchange rate. If you want to use a credit card abroad, it is a good idea to get one specifically designed for that purpose.