Know Your Plastic

There are so many different types of cards available now, that it can be almost impossible to keep on top of which one does what and how much they’re costing you! Credit card, store card, debit card, pre-pay card… So what are they all?

Debit Cards

Quite simply, the card associated with your bank account. They are not credit cards as they take the money straight out of your bank account as you pay for something. Many current accounts also issue debt cards that act as cheque guarantee cards and most of the time, they work in cash machines to make cash withdrawals.

Credit Cards

Credit cards do not take the money straight from your bank account when you use them to pay for something. Instead, you are essentially borrowing that money and you repay it at a later date – often with interest. You’ll often get a monthly statement showing exactly what you owe on your credit card and the minimum monthly repayment is £5 or 3% of the balance (whichever of those two is the greater). Credit cards can usually be used in cash machines too, but you will generally pay quite a fee for a cash withdrawal on a credit card.

Charge Cards

These are frequently confused with credit cards. However, with a charge card, you will receive a monthly bill that you have to settle there and then in full and, on top of that, you will probably be charged an annual fee. Many of them come with predefined maximum spending limits.

Store Cards

Store cards are somewhat like credit cards – except that they are issued by one store and can often only be used to make purchases in that store. As with a credit card, you will receive a monthly statement and will have a minimum repayment to make. Again, interest often applies.

Pre-Pay Cards

These are sometimes known as “electronic purse cards,” and are simply an alternative to cash. You load money onto the card and then use the card to make payments. This is ideal for those who are a little uncertain about entering details online for cards that they have associated with a bank account. In addition, they are ideal for those whose credit rating is too poor to be able to obtain any other type of card. This is the newest of the cards on this list.

That should clear up some confusion – though the way we pay for things is ever changing and by this time next year, there’ll probably be something else new!

Before You Borrow

Consumer driven Britain means more of us than ever are now turning to credit. We borrow money for all sorts of reasons, in the form of mortgages, credit cards, store cards and loans. But before you sign on the dotted line, there are a number of things you really should be absolutely sure to check. Here’s a ‘before you borrow,’ checklist:

  1. Is your loan secured or unsecured? This is crticial. Essentially, a secured loan would be one that could be secured against your home whereas an unsecured loan has no such “security,” behind it. If you go into arrears on repayments on a secured loan, you risk losing your home.
  2. Have you read the contract? And I’m not talking about skimming over it. If you are in the bank and the cashier’s tapping her pen impatiently on the table, it can be a little off putting, yes. But don’t feel pressurised to hurry up over signing the contract. Take it away from the bank, read it properly, reread it and get a second opinion on anything you’re not sure about. Don’t sign something you have not fully read and understood.
  3. Will you be charged to repay the debt early? If you were lucky enough to come into some money a year in to your three year loan contact, would you be able to pay it off without incurring any charges? Believe it or not, some lenders do charge for early repayment. It’s worth avoiding those at all costs. Double check!
  4. Is the interest rate static? Some forms of credit have an interest rate that can change! While a reduction in your interest rate would be a welcome bonus, there’s also the risk that the interest rate could rise suddenly, leaving you with a more expensive repayment than you initially anticipated. If you are happy that you can afford the interest rate as it is at the time of signing, make sure you are on an agreement where it cannot increase. This is one way in which thousands of consumers are caught out every year in the UK.
  5. What are the consequences of missing a payment? Obviously, nobody plans to miss payments (I hope!) but because life is unpredictable, you should know exactly what would happen if you were to miss one. It’s critical that you’re full aware of any penalty charges that might apply in the event that you do miss a payment. If the charges are excessive, don’t sign. Excesive penalty charges can result in a slippery slope between one missed payment and some serious debt problems.
  6. Is this the best deal available? Check the competition. Their offering on the same credit deal might be better!
  7. How much will you pay back? One of the most important questions you can ask is how much you will pay back in total. It is easy to be blinded by interest rates and monthly repayment figures and to miss the total amount. If you borrow £3000, for example, how much is the total repayment going to be? If a lender tells you that your monthly repayment will be £100 a month for 5 years and then throws a load of numbers and terms at you, you’d be forgiven for thinking all was well. But when you really add that up, that’s £6000 total repayment! Twice what you borrowed! It’s imperative that you have an exact figure in front of you for what, exactly, you will repay in total.

Signing credit agreements or loan agreements is a big deal. Don’t put pen to paper until you know exactly what the terms are in clear and plain English.

Thumbs Down to Ending Credit Card Rip Offs

The Government’s proposed plans to end credit card rips offs have been rejected by credit cards providers. This probably comes as little surprise when you consider how the providers are able to profit from such policies, which generally he UK Cards Association, which represents British credit card providers was presented with a set of proposals from the Government at the end of 2009. They included:

  • Setting a regulation that card companies must contact customers who repeatedly only make the minimum payment on their cards.
  • Banning unsolicited credit limit increases for customers suffering repayment difficulties.
  • A notice period of 30 days in which any other customer can opt out of a proposed credit limit increase.

According to USwitch.com, 5.7 million consumers had their credit limits increased in 2009 without their consent. While 43% of British consumers confess that they would be happy with a sudden increase, 50% would not.

Surely, however, random credit limit increases like this only serve to encourage excessive lending and spending? And surely that, in the wake of the toughest recession in a generation, cannot possibly be a good thing.

Either way, these were Government ‘proposals,’ without any element of force behind them. And as the credit card industry has rejected them, it seems unlikely they will go ahead.

Rising Cost of Credit

Despite the fact that Natwest and the Royal Bank of Scotland are now largely publicly owned, the banks have made the decision, in the midst of the worst recession in a generation to raise the cost of credit, leaving the consumer grappling with even higher rates. Each raised purchase and balance transfer rates for both new and existing customers on their Classic cards by 3% from 16.9% to 19.9%. This comes in spite of the fact that the Bank of England have held the base rate at 0.5%. Meanwhile, the private banks are largely making their rates more competitive.

Experts tend to agree that the state owned banks are attempting an opportunistic move in their increases but the question is, will it backfire in light of decisions by other credit card providers not to increase rates?

Barclaycard, Egg and the AA have all extended their introductory 0% balance transfer periods for new customers and provider MBNA has introduced a card that offers a set 5.9% per year rate on balance transfers for life.

With other more competitively priced alternatives on the market, it seems that the publicly owned banks are setting themselves up to see many of their disgruntled customers walk away with their latest attempt to consolidate their own debts.

Reclaiming Credit Card Charges

There has been so much talk of unfair bank charges over the past few years and, more recently, of the Supreme Court decision that threatens millions of consumers’ claims. But there’s far less media coverage about unfair credit card charges.

Yet unfair credit card charges are being successfully reclaimed by consumers as we speak and are an entirely separate issue from bank charges. This means that they were not affected by the recent bank charges verdict.

Consumer law states that any charges levied by credit card companies on their consumers for late payments, or for going over the credit limit, must be proportional to the costs they incur. Yet some credit card providers have been charging up to £35 to send an automated letter! In 2006, the OFT declared that this was unfair and said it would investigate companies making charges of anything over £12 (though many believe that £12 is also excessive)!

However, while the OFT’s stance on credit card charges has little in the way of technical authority, it has made successfully claiming credit card charges much easier for thousands of consumers.

If you have have been charged over £12 in credit card charges in the last six years, you could also claim back money. This applies even if you no longer have that particular credit card – literally to any credit card charges at all within the past six years.

Prepaid Credit Cards Explained

In the USA, prepaid credit cards and secured credit cards have been a thriving product for a few years now. However, we seem to have been a bit slower to catch on here in the UK. But we’re getting there…. While there is still little in the way of secured credit cards available, prepaid cards are really beginning to take off.

But what is a prepaid credit card? Well, essentially it is a payment card that works much like your debit card. You will have a pin number to enable you to use it at ATMs or in stores and it will most likely be a VISA card. The money you spend, however, will not come from your bank account or be applied to a credit card bill that you will receive later on. Instead, it will be deducted from an amount of money that you have already loaded on to the card. In this sense, what are commonly referred to as ‘prepaid credit cards’ actually work more like debt cards. So what’s the point?

Well there are a number of benefits to prepaid cards:-

  • There are no credit checks to obtain them, which means they are ideal for those who, due to poor credit, are unable to get a bank account with a VISA/Mastercard.
  • They offer security for those who shop online a lot (or offline even). If the card is not associated with a bank account, then if you are a victim of fraud, your bank balance is not at risk  by default of someone obtaining the card details.
  • They are great for helping to control your spending. You could, for example, load on your entire Christmas shopping budget and you will know when you have spent up. The cards will not let you spend a penny more than what is loaded on.
  • Prepaid cards are great for travelling and are widely used as an alternative to traveller’s cheques.
  • Top up online or in the Post Office! Most providers permit these forms of top up while some offer other ways in which you can add money too.

Of course, as with anything, there are the downsides too. The disadvantages of prepaid cards:-

  • Many providers charge an application and/or setup fee for prepaid cards.
  • A number of prepaid credit card providers charge for ATM withdrawals, in much the same way a credit card provider would charge for this service.
  • Some, though definitely not all, charge a monthly subscription fee.
  • Some providers charge to renew your card at its expiry.

So the best thing to do is shop around and find the prepaid card that suits you. There are plenty available that do not charge a monthly fee, though most do have some form of charge at setup. However, each provider offers a slightly different package and reading the small print before you apply for anything means you can find the card that provides exactly what you need.