There I was, raising a bread stick to my mouth, when my friend mentioned to me that her credit card is on 37% APR.
“It’s on what rate?!”
Bread stick now floating in my tap water, I began to consider how, unfortunately, my friend is one of the many young people I know who holds a credit card but not quite all of the crucial information attached to it.
My friend is paying roughly £25 off her balance per month, but the interest part of that is actually £15. Therefore, she is actually only paying £10 off the capital, which will take her just over 4 years to clear. When she took the credit card out at 18, she was given very little information about what ‘APR’ actually meant, or about the true responsibility of credit. Now, if this scenario is true for thousands of credit card holders, then it is quite understandable how a substantial number of the nation feels a little in the dark about what that plastic card is actually doing to their finances.
‘Credit’ isn’t always treated seriously enough. It’s represented as invisible money racking up somewhere in Moneyland and there’s no obligation to repay it. Sadly, it hasn’t been emphasised enough in the past that this borrowing will follow you. Credit files are a weird, uncomfortable spectre that link to your address, name and various other details, and you’d be naïve if you think you can hide from it – it clings to you like Peter Pan’s shadow. If you default on a payment or go over your credit limit, then your credit file gets a serious bruising, and this then impacts your financial future.
Thinking that credit has no consequence is where a lot of people go wrong.
It seems that everywhere we turn there’s an advert for another financial product boasting such-and-such APR, but there’s never an asterisk actually telling us (in plain English) what it all means. We need to find a way to simplify credit cards, so that people of all ages and backgrounds feel that the information is transparent and digestible first time.
A lot of people are scared off by the jargon, and often say things like: “Credit cards cause you trouble” and “I don’t trust myself with one”. Let’s get this straight: a credit card is not a living creature. It’s a piece of plastic that you are in full control of. It is more than possible to have a friendly relationship with your credit card, where it can be a tool to enhance your life, without relying on it to a point where you use it too much, or don’t think about it frequently enough and forget to make payments. They can be very useful for short-term borrowing, such as, to buy the materials to redecorate your house, or to pay for an upcoming holiday. But this is meant to be short-term. It is a good idea to have a plan from the outset as to how you are going to pay that money back.
APR (annual percentage rate) is a fancy way of explaining how much interest you’re going to pay. If you kept a balance of roughly £1000 on your credit card for 12 months and your APR was 18%, you’d pay £180 in interest over 12 months. If you pay off £500, then you’ll only have to pay 18% on that balance instead, so it’ll be lower. Equally, add another £500, and you’ll pay more interest again.
My simple calculator for figuring out how much interest you’re going to pay this month:
(Outstanding balance) divided by (100) x (your credit card’s APR) divided by (12 months) = the interest you have due.
Representative rate basically means ‘example of what you could get, not necessarily what you will get’. People are offered different APRs depending on their credit history, so don’t assume that just because a bank or company is offering 6.9%, you will qualify for that rate. Always make sure you know what rate you’re being offered – this is important information. If you don’t know what rate you’re on, call the credit card company (number is on the back of your card, usually) and enquire.
Balance transfer is when you transfer one balance from a card onto a new card, perhaps with a lower interest rate than the last, or a period of time whereby you don’t have to pay interest on the balance. Whilst these might seem like attractive ideas, there is often a catch, so read up on the details before you start shifting balances. In the long run, running from the wolf doesn’t make you any less its prey.
Rewards credit cards can be a nifty way of improving your credit file whilst benefitting from everyday spending. There are types of cards that give you air miles, points, vouchers and cashback, and if you pay the balance off in full each month, you can only gain from it. Call it ‘clever’ credit use.
Rules for success:
- Pay it off in full if you can – don’t pay interest if you can avoid it!
- Look at repayment options. Set up a direct debit, use mobile banking, set reminders on your phone, etc.
- Pay back more than the minimum. This will reduce the capital (the outstanding amount that incurs interest) faster.
Products are quite often changing, so it’s a good idea to occasionally have a little review of what you’re on every 6 months. In your slippers, on the laptop, just spend 20 minutes comparing rates. Still need to have a chat about it? Go into a bank or institution that you trust and ask to speak to an advisor. It might not be as fun as booking a holiday or opening the door to a pizza delivery man, but let’s face it, if it saves you some money and makes you feel a little more in control of your finances, what do you have to lose?