Credit Cards
While you are a student you may have the opportunity to get a credit card. Whilst credit cards can be an expensive way to borrow money, they can also be very useful if used responsibly.
Applying for a card is simple and applications can be made in a number of ways: in a branch, by telephone, online or by post. When applying you will be asked to provide information about where you live, how much you earn and whether you have any other cards or credit. The finance company will then do a credit check and if your application is successful they will decide how much your credit limit (the amount of money you can borrow) will be. Depending on your circumstances this could be anything from £500 to £10,000 or even more.
Credit Card companies sometimes offer incentives such as a 0% interest rate on balance transfers or new purchases for a limited period, free airmiles, or gift vouchers, to entice new customers. However, when choosing a card it is important to also consider things such as what the interest rate will be when the introductory period ends, and whether you are transferring an existing credit debt onto the card, or will be using it for new purchases.
As well as putting a limit on your spending, the card provider will also set a minimum monthly repayment on your borrowing. This is usually the greater of £5 or 5% of the outstanding balance on the card, but may be lower. However, you should beware of only paying back the minimum amount as you will be charged interest on the balance and your debt can quickly grow.
Interest
Interest rates vary from card to card and according to how credit is obtained - for example, the card provider may charge different rates for cash withdrawals, purchases and balance transfers. Rates can vary from under 10% to as much as 29% APR (explained in more detail later)
Withdrawing cash from an ATM or using a credit card cheque is usually the most expensive way of borrowing; as well as being charged a higher interest rate there often be a fee of at least 1.5% of the amount you take out. Most providers also charge this kind of transaction fee if you use your credit card overseas.
As well as charging different rates, providers calculate interest from different times so it can be difficult to compare costs fairly.
Balance transfers
If you already have a credit card debt you may be able to save money by transferring the balance to another card. Fees for transferring a balance are generally around 2.5% of the total debt being transferred, capped at around £50, but card providers sometimes offer interest-free periods on balance transfers. Therefore, if you have quite a large balance, transferring it to a 0% card could give you a chance to clear the debt without accruing more interest. For smaller debts that can be repaid within a few months it may not be worth switching.
Default fees
As well as transaction fees and interest, you may end up paying a fee if you miss a monthly repayment. Following a 2006 ruling by the Office of Fair Trading that card providers were charging unlawfully high default fees, most have now cut them to £12. Those that charge tend to insist on cardholders making monthly repayments by direct debit, which greatly reduces the chances of a payment being missed.
Annual Percentage Rate (APR)
It includes any upfront fees charged by the lender, spread over the period for which you are borrowing the money.
The APR tells you how much your borrowing will cost over the course of a year, as a proportion of the amount you have borrowed. It includes any upfront fees charged by the lender, spread over the period for which you are borrowing the money So if you are borrowing £100 at an APR of 9% you will pay £9 in interest and charges over the first year.
Store Cards
Many shops offer cards which can be used to pay for goods over a period of time. These cards work in the same way as credit cards, but the interest rates charged are often higher. In addition, they can usually only be used to buy goods from that chain of shops.
Store cards often offer incentives such as a discount on your first purchase or a free gift to encourage you to open an account. Remember, unless you plan to pay off the full balance straight away, they can often work out to be twice as expensive as credit cards.