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What is the real cost of using a credit card?


With so much information and product available it can be difficult to understand the true cost of charges and fees associated with credit cards. Failure to understand these costs can result in expensive mistakes. This article aims to help you navigate the expansive market of credit cards and help you pick the best option for you.

What is meant by APR?

Annual Percentage Rate is more commonly referred to as APR and describes the amount of interest a credit card charges on outstanding balances per annum. For instance, if you have an outstanding balance of £500 on a credit card which charges 10% APR, this debt will cost you £50 each year.

What does 'representative' APR stand for?

The majority of credit cardscalculate APR depending on who is applying. Subsequently, when advertising their product, credit card suppliers give quotations for a 'representative' APR. The APR rate your are offered will be dependent on how much risk the lender feels you pose for defaulting on payments, If you don't have a desirable credit history then the card provider may consider you to be a bigger risk than other applicants and offer a more expensive APR rate as a result. However it is important to remember that the advertised APR must be available to a least 51% of all applicants; with this in mind you must check the APR rate you are quoted with the advertised rate, as they may differ.

What does an interest free period entail?

Several credit cards advertise an interest free period for a set length of time starting from the day your credit card is activated to attract potential customers.

Whilst within the interest free period you will still have to ensure the monthly minimum repayments are made as outlined in your terms and conditions however no interest will be charged on your balance by your credit card company.

Although attractive it is important to remember that interest free periods on credit cardsoften differ depending on the type of transaction, for example a balance transfer could have an interest free period of 9 months while the interest free period on a new purchase may only be 6 months. This can result in some transactions accruing interest before others. It is crucial to be aware of the duration of any or all interest free periods associated with your credit cardand ensure all balances have been paid in full before they are set to finish so you do not incur any unexpected charges.

What charges do providers charge on credit cards?

The majority of credit card products make their profit through the interest charged on outstanding balances. Despite this there are a number of different additional costs that you maybe liable for if you fail to adhere to the agreed terms and conditions set forth by your credit card provider.These may include, late payment fees, cash advance fees and a charge for exceeding your credit limit.

However, in most circumstances these charges can be avoided if you ensure your required repayments are met in full and on time and your cards terms and conditions are kept to stringently.You should also be made aware of all possible fees you may incur in advance in the credit agreement that you will sign during the application process for your credit card.

What are the varying APR rates for on credit cards?

Different credit card transactions are often charged at the different interest rate. In most circumstances, balance transfers, purchases and cash advances all have varying interest rates.The most costly of these transactions is commonly cash advancesthis is where cash is withdrawn directly from your credit card.

Do you incur costs if you do not use your credit card?

Generally you will only ever have to pay for a credit card if you use it. However there are some providers who have introduced a “dormancy fee” which is applied if no transactions are made using the card within a set period of time, this is commonly between 6-12 months, the charge will be a set administration fee, it is important to bare in mind that the vast majority of credit card providers do not currently implement the dormancy fee, but it would be wise to check this with you card provider before signing your credit card agreement.

If I spend on my credit card abroad will I be charged?

The answer to this is usually yes; the vast majority of credit cards will impose an additional charge on transactions you make outside of your home county. The fee for this transaction varies greatly from card to card, however it is usually around 1-3% of the amount spent; for instance if you spend £100 you can expect to be charged between £1-£3 on top of the value of your transaction.

If you travel frequently it may be advisable to apply for a credit card that offers no or small fees for transactions abroad. It is also important to check the fees you will be charged by your provided for you abroad before you travel, this will help you avoid any unanticipated costs.

What does the term purchase rate refer to?

The purchase rate refers to the interest rate applied to outstanding purchases on your credit card and is what you'll be charged on all standard card transactions. If you are looking for a credit card to spend on, your biggest concern should be the purchase rate.

To appeal to new applicants most credit card providers will offer a 0% rate on purchases for a fixed period.This means that you will not be charged any interest on your outstanding purchases for the duration of your introductory period. However minimum repayments each month during this period must be made.


Please Note: is not authorised to give advice under the Financial Services and Markets Act 2000.

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