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The costs and charges of credit cards

About the costs and charges of credit cards

This information tells you about interest and other charges which may be added to your credit card including charges when you buy things abroad or if you miss payments. It has information about balance transfers and the types of insurance you may take out with your credit card.

Interest on purchases

If you pay off the whole amount (the balance) owed on the card by the due date, you will not be charged interest on your purchases. But interest may be added for cash advances.

If your credit card company increases the interest rate on your card you should be given 60 days to reject the increase and pay off your balance at the existing interest rate.

You may want to set up a regular payment to pay off your bill in full or to repay what you can afford.

If you pay less than the full balance due, you will be charged interest on what’s left, unless you have an interest free deal. The credit agreement for your card will tell you how much interest will be charged and how and when it will be added to the account. The most expensive debt on your credit card will always be paid off first.

If you can’t pay the whole balance off, you will usually have to pay at least a minimum payment. Paying only the minimum amount each month increases the amount you have to pay overall. The minimum payment may be less than the interest that is being added which means you may never pay it off. Try to pay more than the minimum if you can, to pay off the balance quicker.

From April 2011 the minimum repayment on all new credit card accounts will be reset. If you only pay the minimum repayment you will also pay off one per cent of the outstanding balance as well as interest, fees and charges.

You can use the repayment calculator on the Which? website www.which.co.uk to help you work out when you're likely to pay off your credit card bill and how much more quickly you could pay it off by making a higher monthly repayment.

If you can regularly only afford the minimum payment, you may be running into money problems. Your credit card company should contact you to warn you of what might happen if you only make minimum payments.

For more information about budgeting your household finances, see Budgeting and, in England, Wales and Northern Ireland see Help with debt. In Scotland see Help with debt.

An experienced adviser can help you budget your finances and make sure you're getting any welfare benefits you're entitled to. This should help to sort out any money problems. You can find experienced advisers at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.

Withdrawing cash on your card

Getting cash out on your credit card can be expensive. The interest rate for cash advances is usually higher than the interest rate for purchases.

When you take cash out on your credit card, interest is added to your account straight away, even if you pay off the balance by the due date. You may also be charged a cash handling fee of around 2% of the amount you withdraw.

Using your card abroad

Most credit card companies will charge you a commission charge when you use your card abroad. It’s worth checking this with your card provider before you travel so that you can plan the best way to pay for things while you are away.

If you withdraw cash on your credit card abroad you may be charged a foreign transaction fee on top of the usual cash advance fee. The exchange rate will also affect the amount you pay for an item.

Some card providers ask you to let them know if you are going abroad, for security reasons. It’s worth checking this before you go because if the card company is suspicious about sudden unusual spending, they may freeze your card.

Credit card cheques

It is no longer legal for credit card providers to send out cheques that you can use to withdraw money or to pay for goods or services, unless you have asked them to send these cheques.

If you use a credit card company's cheques, the amount you write the cheque for will be added to the balance on your credit card account. Interest charges for spending on credit card cheques is often higher than for normal spending on your card so check this before you use them.

Be careful when throwing away any unused cheques because they may have details of your credit card account on them. Try to shred them if you can.

Balance transfers

Balance transfer or switching is where you move the amount owed from one credit card to another, to get the benefit of a lower rate of interest or better terms. Transferring the balance can be a good way of paying your card off more quickly.

Many balance transfer deals offer 0% interest on the amount you move. But if you are going to continue to use the new credit card for future spending, check whether a different interest rate applies to any new spending. It could work out more expensive.

If you move a balance to another card you are likely to be charged a handling fee of around 2% of the balance.

If you have a credit card you can use the balance transfer calculator on the Which? website www.which.co.uk to see at a glance how much you could save by switching to a different credit card.

Default and late payment charges

Your statement tells you the date by which you must make your payment (the due date). Depending on how you pay, it may take several days for the payment to reach your account so make sure you pay in time. This is important because any interest you are being charged will be applied to the balance at the due date.

If you pay less than the minimum amount you will be counted as behind with payments and may be charged default or late payment charges. Interest will be added on these charges as well as on your spending, so getting behind can be costly. It might help to set up a direct debit from your bank account for the minimum amount each month to avoid being late with your payment. You can always pay more on top if you have it.

For more information about direct debits, see Banks and building societies.

Check your statement for default charges. Charges of more than £12 for missing a credit card repayment may be seen as unfair. You may be able to challenge the charges and ask for a refund. There is a guide to reclaiming credit card charges on the Money Saving Expert website www.moneysavingexpert.com.

Insuring your credit card

When you apply for a credit card, you may be offered insurance. There are two main types of insurance you are likely to be offered with your credit card. These are:

  • payment protection insurance
  • card protection insurance.

Payment protection insurance

Payment protection insurance (PPI) covers your repayments if you lose your job, become ill or if you die.

Before you take out PPI, check the policy details carefully to make sure it covers your situation and needs, particularly if you are self-employed, you work part-time or if you already have an illness or disability.

If you make a claim, some policies will only pay out a fixed amount of money or make repayments for a certain length of time.

In England and Wales, for more information about PPI see Payment protection insurance in Credit and debt fact sheets.

Card protection insurance

Card protection insurance covers you if your card is lost or stolen.

Whether or not you have card protection insurance you should always contact your card provider immediately if your card is lost or stolen.

Further help and information

On Adviceguide

For more information about how to deal with credit cards, see Credit cards.

You may also find the following Adviceguide information helpful:

The Money Advice Service

The Money Advice Service is a free, independent service. Their website (www.moneyadviceservice.org.uk) has lots of useful information about borrowing and managing your money.

Go to their website for more information about:

MoneySavingExpert

For a guide to reclaiming credit card charges, go to: www.moneysavingexpert.com.

Which?

Repayment calculator www.which.co.uk.

Balance transfer calculator www.which.co.uk.

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