Although it’s probably the most important feature of any credit card, most people struggle to determine exactly how much it costs them to borrow money through credit. In fact, many of us simply don’t know how our credit card interest rates are calculated.
Even if you’re looking at your credit card, you might find that it’s difficult to work out the actual rate of interest that you need to pay over the course of several months. However, if you withdraw too much money from a cash machine, or you forget to clear the full balance on your card each month, then you could quickly suffer from some pretty severe interest charges.
How Your Credit Card Works
Your credit card basically works as a short-term solution for lending small amounts of money. The money that you spend on your account is borrowed, which means that you need to pay it back, plus a small fee. The fee that is required can be calculated as a percentage of the amount borrowed, and can be added to the total amount owed until you clear your full balance.
The thing that makes matters more complicated, however, is the fact that the way the interested owed is calculated can vary from one card provider to the next. However, with this in mind, it is possible to use an interest rate calculator to get a better idea of the amount you might owe.
Usually, interest rate for loans and credit cards are expressed as “Annual Percentage Rates”, or APR. However, you shouldn’t be confused by the use of the term annual, as APR is applied to the amount you need to pay on a monthly basis.
Even if you have a good idea of how much interest you pay out each month, working out your present level of interest will depend entirely on the calculations that are used by your bank, and you may find that even an interest rate calculator online cannot offer you an exact insight into your payments. Instead, you will need to contact your financial services provider, or the bank that gave you the credit card.
Making Minimum Repayments
One important thing to understand regardless of what your interest payments might be, is that you need to follow a set of simply rules if you don’t want to owe the person responsible for your card any more than necessary. The first is to make more than just minimum repayments regularly. The minimum repayments on your card are the amount that you have to repay each month to make sure that your credit file isn’t harmed.
While this might seem simple enough, the fact that minimum repayments that you will need to pay are so low can mean that they often stretch out over a very long period of time, meaning that you end up paying much more in interest. Thanks to legislation published in 2011, minimum repayments must now measure out at least 1% of your complete balance plus additional interest, as opposed to being an interest-only option.
The good news of the latest regulations is that no matter how small your repayments may be, you will eventually pay off your credit card balance.
How to Pay off Your Credit Card
Rather than find yourself in a difficult cycle of debt, it’s important to make sure that you take steps to repay your balance as quickly as possible. After all, the quicker you pay your balance, the less interest you’ll need to pay. Often, credit cards are used as a last resort for big purchases which can’t be covered through a single payment, which means that you probably won’t be able to give back the money you borrow immediately.
If you can’t immediately repay the amount you borrow from your credit card, one good option may be to set up a direct debit for a certain level of money that you know you can reasonably afford each month. Estimate how long it might take for you to pay off your balance by paying back as much as you can without causing any damage to your life, such as by reducing your ability to pay for bills or food.
If you’re concerned that you don’t have enough regular income to establish a payment for a higher amount than the minimum every month, don’t worry. Usually, you should be able to get a direct debit running for the minimal payments you can offer, and also offer further payments at certain times to work off the extra parts of your balance whenever possible.
Just remember, paying back your credit card debt properly is not only important to keep you on top of your budget, it’s also essential for maintaining a healthy credit history. Every debt you maintain is kept on file by reference agencies who assess the risk of lending to customers. If you miss out on a minimum repayment to your credit card, not only will you suffer from fines, but you’ll also end up with a black mark on your credit file.
Loans without credit checks generally come with a much higher level of risk and higher amounts of interest, which is why it’s generally a better idea to consider taking steps to positively change your score, than applying for a loan without good credit. One of the most dangerous forms of bad-credit loan is a payday loan, which can make it very expensive to pay back the money you owe.
Although your credit rating is often checked before you are given any form of loan or credit, you might be able to get a loan without a “complete” or full credit check. This means that you’ll only get a basic check to ensure you’re not bankrupt, or fraudulent. If you’re offered a loan without any check at all, avoid dealing with that company at all costs.
Unfortuantely, any lender who is willing to take the risk of only running a basic credit check will require you to follow strict terms and pay high costs on interest, which can sometimes lead to a serious spiral of debt.
What is a Credit Check?
A credit check is a type of examination which is conducted by financial institutions like loan providers and banks when you apply for one of their key products. These people look at your credit report, which displays a history that outlines your financial behaviour, including the various debts that might be still owed, debts repaid, and missed payments, and other information such as defaults.
A credit report will also come with a score, which is based on how much risk you appear to take with your finances. Banks, building societies, and lenders examine your credit report as a crucial factor when rejecting or approving applications, and most of the loans you try to access will include some manner of credit check.
Credit Scores and your Ability to Borrow
So, how does your credit score change your borrowing opportunities?
Every one of the main report providers for credit score companies come with their own scoring system, generally calculated based on a range of important risk factors. These issues are considered, and the credit report providers often conclude that the higher your score is, the less of a risk you will probably be. At the same time, the lower your score is, the more of a risk you are considered to be.
Lenders are far more likely to approve applicants who pose no or little risk, according to the system for checks that they carry out. If you pay bills on time and you don’t have any, or much outstanding debt, or a history of any missed payments, then your score should be good. This is because behaviours such as these help lenders to figure out what your future behaviour with finances is likely to be like. Unfortuantely, credit scores can be very unforgiving, and one difficult time can be enough to prevent you from getting access to crucial deals in the future.
Types of Loans that Don’t Need Credit Checks
Some of the loans that you might be able to access that don’t require credit checks range from very dangerous options like payday loans, to slightly less worrisome solutions like guarantor loans and secured loans – which still present their own threats.
Guarantor loan providers may only need to conduct a check on your guarantor – the person who is willing to guarantee that you will either pay back the loan, or they will be responsible for paying it on your behalf. Often, these loans are credible, cheaper, and easier to pay off than payday loans, but still pose a great deal of risk.
Similarly, because many unsecured loan will hesitate to lend you money if you have bad credit, there some options available on today’s market that might cater to people with bad credit scores, though you will have to pay high interest rates. Additionally, secured loan providers are more often willing to lend to people with poor credit, but that is because you will assume more risk as the customer, and take on higher interest rates too.
Credit Unions and Credit Cards
If you’re looking for a safer way to borrow money without too many credit checks, then credit unions and credit cards are one of the best ways to borrow. For instance, credit unions are great for those who have already been a member in their union for some time to access a loan with limited amounts of interests to repay. Usually, you will need to have been a savings account holder for some time to access these deals, but some credit unions will make exceptions.
Additionally, credit cards can be quite flexible, particularly for those who only need small, short-term loans. There are a host of “bad credit” options available in the credit card market, which have been targeted at people struggling with poor credit.
If you own a credit card, and you know that you have the ability to pay off the balance that you build up in full, then you might find that there are certain benefits to making regular payments on your card throughout the course of your day-to-day life. However, if you find that you’re only ever paying off a fraction of your balance each month, then you should probably avoid spending more on your cards.
Knowing how and when to use your credit cards is an important element in making sure that you can be cautious and thoughtful with your finances. After all, as useful as credit cards can be for helping us to stagger repayments on bigger items and access cash when we need it most, they also have dangers to consider in the fact that you can easily start to generate large amounts of debt on your credit card if you fail to make regular repayments.
With that in mind, there are some purchases that should almost always be put on a credit card before you part with your cash – particularly if your provider offers you a reward in the process.
Here are a few things you should buy with a credit card.
1. Tickets and Travel Cards
If you constantly take the train to work and back every week, then you’re probably going to buy an annual or monthly train ticket. Paying for your travel card or season ticket through a credit card can mean that you avoid having to take that large sum out of your bank every month, and instead maintain your savings for a little longer. Additionally, putting this purchase on your credit card may help you to budget more efficiently, and give you more space to breathe financially.
2. Flights, Hotels, and Holidays
When it comes to protecting large purchases, it makes sense to pay for your accommodation, flights, and vacations on a credit card. Having a trip fall through because your chosen airline, hotel, or travel agent has suddenly gone bust can be a terrible experience, and if you can’t get your money back, the whole thing gets a lot worse.
Fortunately, if you have an airline rewards card, then you can pick up airmiles to use on your next vacation., Just remember that some sites may add fees at the checkout for choosing to use your credit card. There’s usually a small percentage on top of what you have paid, but this does come with extra protection.
3. Shopping from a Supermarket
Shopping for food with your credit card can help you to budget your expenditure more effectively, and if you have a rewards card, it could mean that you end up with extra bonuses and savings to enjoy next time you’re in a store. Compare the different credit and reward cards available to you to see what you can access by shopping with your credit card.
Just remember, if you’re not very good at sticking to a budget, it may be a good idea to examine your weekly spend in detail and see what you can cut back on, keeping the budget to a more manageable amount each month.
4. Large One-Time Purchases
Credit cards are ideal for one-time big purchases, such as sofas, televisions, appliances, and other such items. If you have a 0% purchases card, then you should be able to spread the expense of your big spend over a number of months, and avoid interest too.
Just make sure that you shop around to find the best deals and credit cards that will help you to soften the blow that big purchases make on your bank balance.
5. Christmas Gifts
Finally, Christmas is a very expensive time of year for most people. While spending mostly on your credit card might not seem like a good idea, there are some benefits to this route. For instance, your purchases will be protected if you buy anything that costs more than £100, so you can at least get some of your money back if something goes wrong.
Additionally, if you take out a new balance transfer card when the new year rolls around, you can transfer the amount you spent at Christmas over to a 0% interest solution that allows you to pay off the debt in comfortable installments.
Be Careful with Credit Cards
Besides protection on purchases, credit cards also give you the choice to determine how much of your monthly income you want to spend on regular items, and how much you should leave behind to pay credit card bills. Just remember to budget carefully so that you’re always making at least the minimum repayments, and that you never default on your payments. The last thing you want is to start building up a credit card debt that’s difficult to escape.