Credit cards: FAQs
When used carefully, credit cards can help you to manage your money but they come with a lot of specific terminology. We've put together some answers to frequently asked questions on the subject.
What is credit card APR?
APR stands for Annual Percentage Rate. It is a standard way of comparing the cost of different credit cards, taking into account interest rates and other charges.
In theory the lower the APR the cheaper the credit card, but this is not always true because of the different ways card providers calculate interest rates.
The representative APR (the one that's advertised) may be different to the personal APR you receive, which is based on your credit rating.
What is a purchase rate?
If you don’t pay off the full balance on your card each month, you will be charged interest on the value of any purchases you’ve made – this is the purchase rate.
What is a cash withdrawal rate?
The cash withdrawal rate is interest charged when you use your credit card to withdraw cash. This may be higher than your purchase rate and is charged from the day of the withdrawal, even if you pay off your balance in full when your monthly statement is released.
What is a balance transfer?
This is when part or all of a debt is transferred from one card to another, often to save money by moving to a lower interest rate. For example, you might transfer a debt on a store card with a high APR to a credit card with an introductory rate of 0% on balance transfers for 12 months. This could help you to consolidate debts or pay an existing credit card debt at a lower rate. Lots of card providers offer an introductory rate such as 0% – plus a transfer fee which you should take into account – but after the introductory period it will usually revert to the standard rate.
What is a balance transfer rate?
The balance transfer rate is the interest charged on a debt transferred to the card from elsewhere. Many providers offer special introductory balance transfer rates.
How do cashback credit cards work?
This type of card allows you to earn money back as you spend, usually as a small percentage of purchases. Levels of cashback will vary, so compare cards to get the best deal for your spending habits. Some cards offer special high rates of cashback for an introductory period, or when you shop at certain retailers.
Why was I charged for a purchase on my 0% balance transfer card?
Cards with special introductory rates on balance transfers usually have higher rates for purchases and withdrawals. Any payments you make to your card provider usually reduce the balance being charged at the lowest rate first. This means that you won’t pay off any purchases until you’ve cleared all of your transferred balance. A way to avoid this may be to transfer existing debt to a card with the best balance transfer rate, and use a different card to make purchases.
I was charged a late payment fee, what's this for?
Card companies do charge if you pay late or go over your credit limit. In July 2006, most providers were made to cut these charges to around £12 by the Office of Fair Trading. If your late payment wasn’t your fault, for example if your statement arrived late, your card provider might waive the charge if you ask them.
Do I need credit card protection insurance?
This protects you in the event of loss/theft and any fraudulent use of your card resulting from that. However, under the rules of the Payment Services Directive banks must refund you immediately if you are a victim of fraud, unless they can prove that you acted negligently or fraudulently. The most that you can be liable for is £50, but this is often waived.
Purchases on your card between £100 and £30,000 are covered under the Consumer Credit Act. This means that you should be able to claim back any losses – for example if the goods never arrive or the company you bought them from goes bust – from your card provider.
Most people will not need credit card protection insurance, and you should be wary of attempts to sell you financial products that you do not need.
Why is my credit limit higher than the one I applied for?
If you pass the credit checks carried out when you apply, you will usually be given the maximum credit limit available. You can contact your card provider and ask them to reduce it for you.
What should I do if I'm turned down for a credit card?
If a lender turns you down, they should tell you whether you've been refused because of a search on your credit file and, if so, which credit reference agency they used. You can ask for more detail but they do not have to give it to you.
If you are turned down for this reason you could take steps to improve your credit rating to improve your chances of success next time around. Resist the temptation to simply keep applying for different cards; if you are turned down too many times it can affect your credit rating.
What should I do if I get into credit card debt?
If you find that your credit card debt starts to build up, take control straight away – don't just ignore it. Try and pay the full balance on your card each month, rather than sticking to minimum payments. Minimum payments are usually set very low, sometimes as low as 2% of what you owe, so if you only make minimum payments your debt could take decades to clear, and cost you thousands of pounds in interest. If you're unable to clear the full balance each month, you might be borrowing more than you can afford to pay back.
If you can't pay off the full balance, make a budget to help you identify areas where you can make cutbacks and create a repayment plan to ensure you're on course to meet your debt obligations. Remember that you don't have to pay for debt advice; there are a number of charities and organisations who will help you for free.
Last updated: 22 May 2015