Managing your credit card account
Credit cards can be a handy way to borrow if you use them in the right way - but get it wrong and you could find that your debts spiral out of control. Follow these simple tips to manage your card correctly.
Keep your PIN secure
- Don’t store your PIN with your card, or give it to anyone else. If you do, and someone takes the card and uses it, the bank won’t pay you back what’s stolen – they would if it wasn’t your fault.
- Change your PIN to something you’ll remember. You can do this at most cash machines. Pick something you can remember, but not something like your date of birth that others could guess.
Check your bill
- Open your bill, sit down with it, and check through it – don’t just leave it on the kitchen table. Query anything you don’t recognise.
- If you get your statement online, be organised about when you log in to check it. Do it on a particular day – say a week before the payment’s due.
Plan to pay off in full each month
If you don’t completely clear your balance, you could get charged interest on everything on your card, depending on your card company – even the money you spent that month. If you ran up a credit card bill of £100 during the month and paid off £99 at the end you could be charged interest on the whole £100, because you were still £1 in debt.
- Debts can spiral out of control. Because you pay interest when you don’t clear your card each month, debts can mount up and take a long time to pay off.
- Interest charges and the way they are calculated vary considerably between companies. The Which? site has a useful explanation and guide to interest on credit cards
Avoid the late payment trap
If you don’t pay your bill on time, there could some serious consequences.
- Fees and charges. You’ll be charged a late payment fee, plus interest on the whole amount you owe.
- Increased interest rates. If you’re a repeat offender your card provider may increase your rate or reduce your credit limit.
- Problems getting other credit. Paying late can damage your credit rating, making it harder to get loans, mortgages, other cards and even phone contracts.
However, there are ways to avoid paying late.
- Pay by Direct Debit. The best way to avoid the late payment trap is have the money go out of your bank account automatically. Ideally, set up a Direct Debit to pay off the full amount every month.
- Pay with time to spare. Although you can pay your credit card bill by phone or online from your bank the same day, it can take a few days to process your payment. So it’s better not to leave it to the last minute.
Avoid the minimum payment trap
The minimum amount you need to repay on your card each month is often quite small – perhaps a percentage of the balance. It’s always at least the interest, plus any charges and at least 1% of the balance (assuming it was taken out after April 2011). But paying just this amount will cost you much more in the long run. You could be making repayments for years and end up paying more in interest than the original debt.
Let’s take an example – a debt of £1,000 on a credit card with 16.9% APR. The minimum repayment for this card is 2% of the balance, or £5 – whichever is greater. The first payment will be £20, but this figure will fall as you repay the balance. The table shows how much you could save if you repay the same amount every month.
|Monthly repayment||Time you take to repay||Interest you pay||Total you’ll pay back|
|Minimum (2% of balance)||22 years, 11 months||£1,530||£2,530|
|£20||6 years, 10 months||£635||£1,635|
|£50||2 years, 8 months||£167||£1,167|
Remember, if you don’t pay off the whole bill you get charged interest on everything on the card , including new things you bought that month – so if you keep spending on that card you’ll end up paying even more.
Keep within your credit limit
Don’t go over your limit – if you do you’ll be charged a fee – normally up to £12.
Contact the card provider to request an increased credit limit. But only do so if you’re sure you can comfortably repay the higher amount – and won’t be tempted to over-spend and rack up more debt.
Don’t use cash withdrawals or credit card cheques
Credit cards aren’t like debit cards – you can’t withdraw cash for free. You’ll pay fees and higher interest than normal, even if you pay off your card in full at the end of the month as there’s no ‘interest free’ period unlike purchases.
You’ll usually pay the same fees and interest as you would for cash withdrawals if you carry out other transactions, such as:
- Paying for something with credit card cheques (always avoid using these)
- Buying foreign currency
- Buying postal orders
- Gambling transactions, and
- Competition entry fees.
Avoid recurring payments on your credit card
A recurring payment sometimes known as ‘continuous payment authority’ (CPA) lets a company put the charges onto your credit card bill automatically. But it’s not as safe as a Direct Debit from a bank account.
To cancel a recurring payment, contact your card provider and tell them that you withdraw your permission for the company to take payments. If your bank allows the company to take any payments after that, it must refund this money to you along with any related charges. But you have to let them know no later than the end of the previous working day.
Recurring payments are best avoided because of the danger that you won’t realise how much is on your bill, and you might go over your credit limit accidentally, leading to charges.
Protecting your payments
If you’re worried that something might happen to stop you making payments on your credit card debt (perhaps if you lose your job) there is insurance you can buy. Think very carefully before going for it – it’s expensive, controversial, and you might already be covered by another insurance policy.