Great if you use them correctly (Credit Cards in general)

Member Name: Coxy1974

Product:	Credit Cards in general
Date:	02/01/07 (471 review reads)
Rating:

Advantages: Flaxible and great emergency back up

Disadvantages: Easy to fall into the debt trap

I'll start by saying that this review bears no reference to any particular credit card company or lender.

I got my first credit card when I was 21. I knew nothing about interest rates etc so I just went into the bank. It was issued but the interest rate was something like 19.9% APR. This was in the times before credit card companies made the trip over the Atlantic.

3 years later I found myself working for one of the said credit card companies. I was ideally placed for knowing what it took to get a card as I was one of analysts who said yes or no. I still had the same card but boy did working for a credit card company actually open my eyes.

The market was being flooded by new companies offering cheap credit on ‘Teaser Rates’ low interest rates for a certain period of time before moving to a higher rate. Some companies even offered 0% on all purchases in the first 6 months of the account life. I very quickly switched card issuers.

The application process

There are various different pieces of criteria that you need to satisfy in order to get a card and all companies use different criteria. This criteria remains a secret to the customer as it is designed so that customers cannot manipulate the system.

Credit Scoring is very often used to system generate a decision to sort out the immediate declines based upon credit files from Experian and Equifax. Fraud information is also looked at to prevent identity theft. The rules are stringent too! The Financial Services Authority regularly audits the companies and will fine any that are non compliant.

Another hurdle is to prove your identity. Sometimes you will be asked to prove you live where you say you do by sending in a couple of bills/bank statements etc. This is usually because the credit card company has been unable to confirm your residency at the application address through electronic means. This is an Anti Money Laundering guideline set by the Financial Services Authority.

Interest Rates & Terms

Once you receive the card that's when you need to check the Terms and Conditions really carrefully.

Most companies offer insurance on purchases - this is free! It means that if you buy something on your card and you break it on the way home then you can contact the card issuer and have it replaced!

Also check the APR (annual percentage rate) and break it down into monthly percentage rates. Average now is about 14.9% so over 12 months is about 1.24% each month of the current outstanding balance as at statement date. You do not accrue interest on purchases made that month - you usually receive 56 days interest free period on those if you buy at the right time of the month.

Cash Advances - where you withdraw money from a cash machine. This is higher interest and accrues daily from the moment you withdraw the cash. Do this at your peril because should you not clear your balance when the statement arrives your payment will not clear the cash advance. Basically the way the payment works is this

New purchases - not paid - these are rolled over onto the next months statement where they will accrue interest.

Outstanding balance from previous month - certain percentage applied of payment

Cash Advance - small percentage of payment allocated to this.

The percentage allocated depends on the credit card company and is set out in the very small print of the Terms and Conditions.

It may not be completely apparent from your statement either the amounts of interest you are paying on each entity of your balance on your account. I think credit card companies design them this way so that these are hidden and it is confusing.

I now have 3 credit cards - one that I have which has a zero balance, one that has an interest free period on that has my main balance and an internet card that has a low limit to minimise fraud online.

I have worked out how much I need to pay each month to pay off my balance within the interest free period so I won't pay interest.

Some terms that you may hear also

Balance Transfer fee – companies now charge between 2 & 3% to transfer a balance from another card. Introduced because ‘Teaser Rate Hoppers’ were costing the industry millions

Teaser Rate Hoppers – people who hop between cards for the low rate to avoid paying interest on balances. I did this for years until the Balance Transfer Fee was introduced.

PPI – Payment Protection Insurance. Beware of this – companies make a lot of money selling this insurance. It’s costly because the amount you pay is a percentage of your balance so the amount will vary each month – although if you have no balance then you pay nothing as there is nothing to cover that month!

Benefits of having a card

•Most hotels don’t accept bookings unless guaranteed by a card
•Insured purchases
•Disputes are handled quickly
•Good fraud prevention measures in place
•Interest free period – up to 56 days if you buy at the right time of the month
•Flexibility
•Peace of mind knowing that should there be an emergency you have something to fall back on quickly

Downsides to having a card

•Can be expensive if you don’t clear balances
•Cash Advances are very costly
•Confusing
•Application process can be lengthy
•Risk of Fraud
•Easy to get into debt

My top tips

•Compare credit card companies very carefully – use a website such as uswitch.com to compare prices
•Don’t automatically go with the company that offers the most attractive ‘Teaser’ look at the longer term options too
•Try a reward scheme card – some companies offer cashback based upon monthly spend and rather than receiving the cash back you can ask for this to be cleared off your balance
•Be prepared to prove your identity
•Take care when spending – I keep a spreadsheet detailing what I’ve spent on which card and works out the interest I should pay – if there is anything different on the statement I query it!
•Check your credit file – everyone has one with both Experian and Equifax. You’d be surprised at what is on there!
•Always make sure you pay before the statement date – for a cheque you need to ensure that this is posted at least 10 days before the payment date. Online you need to make the payment 1 day before at the latest.

Credit Files

Credit files exist as a Fraud Prevention method and also to help lenders make more informed lending decisions. It will consist of the following

•Electoral Roll information
•Public Information – County Court Judgements etc
•Accounts you have open
•Credit Searches companies may have performed when you applied for credit (you will only see these going back 12 months)
•Fraud Information
•Linked Addresses – addresses you may have lived at within the last 6 years

The information that is provided to the credit reference agencies is the property of the subscribers so when you get hold of your file if there is anything wrong then you need to contact the company itself rather than the agency.

There are several agencies but the 2 main ones are

Experian – based in Nottingham and the main credit reference agency. Web address is www.experian.co.uk

To obtain a copy of your credit file navigate to Online Credit Report where you can view your report online for a fee of £2 payable by credit/debit card (ironic!) or you can phone 0870 241 6212 where the fee is £2.50 and it takes about 7 days for a paper report to be sent to your home address.

Equifax – based in Glasgow and is the secondary agency. Web address for ordering your report is www.equifax.co.uk and navigate to Equifax Credit Report. The cost for this is £14.95 for an online comprehensive report.

The information that is shared shows the accounts you are running (including closed accounts), balances, credit limits, payment history.

The website will guide you through exactly what each part of your report means. If you receive a paper report it will come through with a ‘Guide to understanding your credit report’ which explains what each piece of information means.

I order a report from both Experian and Equifax (as most companies use both agencies these days) every 12 months. The only reason I do this is because I had trouble getting my mortgage the other year because I had been incorrectly aliased to someone who had defaulted on a Mortgage in Northampton – her date of birth and first name were the same as mine and I had huge problems proving she wasn’t me! Not the credit reference agencies fault but the mortgage companies.

Summary: I'll keep looking for the next best deal - can't do without it now!