Skip to main content

Low interest credit cards - how to make them work for you

Credit cards are borrowing instruments, unlike debit cards where you already have the money. Banks are there to make money too. Just like high street stores, they hope to maximise their profits within the rules. So it’s important to understand the basics and find a credit card that’s right for you – you can compare low APR credit cards here.

Now you know the rules, let’s find out how to play the game. The financial services industry charges interest on the money that it lends out. Let us assume you borrow £100 on your credit card and keep it for exactly one year before you pay it back. For the purposes of this article, we will assume your loan attracts 8% interest per year, which is the Annual Percentage Rate, or APR for that particular transaction.
Practical example

If you paid the loan back in one go at the end of year one, you would owe them £108. That is, your original £100 plus 8%. The bank will likely ask you to pay the interest monthly though. Divide £8 by 12 months, and you get 67 pence a month (well 66.66 pence if you insist). If you decide to repay the loan back after six months – but paid no monthly interest – then you will owe them £104. When you think about it, the APR will still be 8% per full year.

Let us try something different. Suppose you paid back £50 after 6 months. In this case, your situation would look like this:

• First six months, interest added £4 (capital sum £100)

• Second six months, interest added £2 (capital sum £50)

The total interest of £6 you pay is only 6% of the money you originally borrowed. But then, you did give them back £50 halfway through, which is why there is a saving of £2 overall. Moreover, you only have to scratch around for £52 at the end of the loan period. It always makes sense to pay a loan off quicker.
Penalty interest

Of course, if you fall behind on monthly interest payments (or fail to pay the loan back on time with interest) then the situation will look different. Now here is a hot tip. Some card firms with the lowest advertised APRs charge the highest penalty interest rates, if you are late with payments. So pick your service provider with your own plan in mind.

Using a credit card for purchases

Pretty much the same logic applies: if you keep up with payments and do not overspend, your situation should stay under control. If you do not though, the interest can spiral out of control to the extent that you can hardly keep up with it. Yet another good reason not to use your credit card for luxuries like beer and holidays.

Is the lowest APR the best?

Not necessarily. Here are some tips that will help you make the right and most informed decision:

• Only half the customers that apply get advertised APRs. Learn to look for terms like “representative” and “average” in advertisements.

• In practice, credit card firms do creditworthy checks, analyse our individual payment records, and then apply an APR that balances out their risk.

• Be wary of choosing a particular card because of the “free” add-on rewards. You have to spend money to qualify for them, meaning they’re not free after all.

• Aim to pay for your purchases every month, and repay your loans on time. If you do not, be sure to compare the penalty interest rates you will end up paying.

So is a credit card a bad thing?

Definitely not, credit cards have many benefits. These include a plan in hand for unplanned expenses and detailed statements so we can see where every pound we spend goes. That said it is important to use a credit card responsibly, so you stay out of financial trouble, and avoid that dreaded bad credit record.
Finally, a quick word on whether to have a credit card at all. In the UK, you can seldom borrow money if you do not have a record of previous credit. This can be a real bind when you need a mortgage to buy a house. A clean credit card is the perfect way to build your reputation. Just choose the APR most suitable for you.

Comments

Popular posts from this blog

Why it’s important to save for retirement

While retirement may seem far off in the distance for some, financial experts say you’re never too young to begin saving.  In fact, the earlier you calculate your retirement needs and start building your nest egg, the easier it will be to create a viable plan for the future. Many experts advise you begin saving a percentage of your income for retirement as soon as possible, no matter how little the contribution may be, as it’s possible the Social Security benefits millions of people currently depend on may be in jeopardy.

How does a Prepaid Credit Card work?

Can They Really Be a Solution to Avoiding Credit Card Debt? When it comes to plastic, there are a lot of choices out there. Not only do you have the choice of credit card , debit card, or prepaid credit card, but you also get to decide which financial company you want to use as your card provider. Credit cards and debit cards are both risky. Credit cards can help put you deeper into debt, while debit cards give thieves and collectors access to your entire bank account. A growing number of people are finding that prepaid credit cards are becoming the best option. What Are Prepaid Credit Cards? Prepaid credit cards look and act just like a credit or debit card, except you put the money on the card before you make any purchases. You are only allowed to spend as much money as you have pre-loaded on the card, which means that you are not at risk of going into credit card debt from overspending. These cards also keep your money safe, because thieves will be limited to the amount that is on t

What are the Consequences of Overspending in Life?

How overspending can ruin your financial life? With today’s expenses and their prices, it can be very hard not to overspend. Still, that isn’t an excuse to stray out of your budget. You know why? It is because overspending can only lead to more problems than you think. Overspending can affect your whole life. With all the possible consequences, it may jump from one problem to another. Unpaid bills All the excessive shopping with your credit card can cause steep bills at the end of the month. If you keep on using your credit but don’t have enough money to pay for it in the end, then you’re surely in for a huge financial disaster. This will turn out to be missed payments, and missed payments will ruin your credit report. Missing out on payments will get your credit report marked for 7 years or more. And you can’t get rid of them by finishing them off. Credit report Overspending can cause a chain reaction of events. Once you get your bills due to overspending, it’s possible for you to mi

How to Make Your Title Loans Safe and Sound

Although title loans are tagged as risky, innumerable folks still use them for fulfilling their different financial obligations. Therefore, such loans are not completely bad because their significant use despite the risk factor says a lot of their pros. This makes it vital to discuss how these loans should be used so that the risk factor can be minimized up to a great extent. For those who are not aware of, the risk of title loans crop up in the form of consequences when you fail to pay back the loan. With such a failure, you are surely going to lose your car as well as decrease your credit score further.

Money Moves: Imagine Playing Your Financial Life like a Chess Game

To say chess is a popular game would be a gross understatement. Chess, for at least 1500 years, has been considered to be not just a game, but a true test of intellect and character. One can learn a great many things about chess that can be applied to one’s life, not the least of which is one’s personal finance. Chess is a game that requires patience, foresight, and an ability to understand your opponent. Much like your personal finance, these qualities are required for you to come out on top in the end. Here are a few things you can take away from playing chess and use to improve your financial life:

The Financial Implications of Wills and Probate

Despite the stress and sadness that surrounds the passing of a person, death is synonymous with money. If the deceased has left behind anything of value, the family of that person is forced to deal with the access and distribution of such assets. This may entail the payment of inheritance tax, analysis of the will, and the application for probate. Probate is basically the process involved in establishing who can distribute the assets tied up in a will. In most cases, the deceased should have named an executor in their will – this is the person responsible for obtaining probate and dealing with any other financial implications of the death. The amount payable in inheritance tax is declared by the government or state, and the desired distribution of any monies and other assets should be clearly laid out in the will. However, the cost of obtaining probate is a further financial implication of death and one that can vary wildly should it not be carefully monitored. Whilst probate is