Spend! Spend! Spend! (Credit Cards in general)

Member Name: zOOm

Product:	Credit Cards in general
Date:	21/08/01 (119 review reads)
Rating:

Advantages: convenient, safe, rewards

Disadvantages: can be used for fraud

Credit cards are a great invention aren't they? You walk around with this little card in your wallet and you can literally do thousands of pounds of shopping without actually carrying a penny on you!

I love the convenience of credit cards, they are small and easy to use and give you so many extra services.

Lets start from the start:

What is a credit card?
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A credit card (in rather than a charge or a debit card) is a card given to you by the issuer (your bank usually) that allows you to spend money that you don't have at the moment. That's why you have a "credit limit". The bank (or the institution - I'll just call it bank from now on just to keep things simple) will "assess" your credit worthiness and issue you with a credit card with a spending limit. This is based on the bank’s perception of how much you can repay every month. So, if you are a student, you’ll most likely get a credit limit of somewhere around £500 - £800 and if you are a high-flyer your credit limit might be £40,000. All up to the bank.

As you use the card, the bank will assess your usage and your repayment history and might raise your limit without you even asking for it. Basically, as long as you end up paying most stuff on time you’ll get your limit raised.


Why get a credit card?
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1) The convenience

Firstly there is the convenience! Credit cards are protected property, so if you lose them, or they get stolen, your bank will replace them for you (usually within 24 hours) and you won’t have to pay for any “unauthorised” use. This basically means that if someone has stolen your card, forged your signature and spent £1000, you don’t have to pay it as long as you had reported the card as lost or stolen. Imagine losing a £1000 in cash, would you ever see it again? Would anyone compens
ate you for it?

Also, if you do a lot of travelling, what would you rather do? Carry around huge quantities of the currency of the country you are visiting or carry around a VISA or AMEX that is accepted in more than 16 million places! (Yes, that did sound like an advertisement – but it ain’t, it’s just a fact that supports the op). Imagine you’re going on a world tour, how much cash would you have to carry with you?


2) The extras!

Purchase Protection
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Do you really know what extras you get with your credit card? Firstly there is “purchase protection”. What that means is that your credit card company will reimburse you for any product or service that you have purchased with the card but didn’t get around to using. This usually differs from card issuer to card issuer. For example, I have a VISA card from The Netherlands that will replace anything I purchased with the card if the product gets accidentally damaged within one year! I also have a VISA from the UK that will only do this within 90 days. Still, it ain’t too bad is it? You buy a pair of Ray-Ban sunglasses for £125, leave them on top of the car roof and drive away! If you had purchased them with your credit card, you’d get a new pair. If you paid for them in cash, tough luck!

A budget airline (Compass) in Australia had gone bankrupt a few years back, everyone (including some people I know) lost money. American Express took a full page add the next day, whoever had paid for their tickets with American Express, would get their money refunded in full. Of course Visa & MasterCard would do the same because this is standard practise, but I thought it was very clever marketing from American Express indeed.


Travel
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Most credit cards (at Gold or Platinum level) give you automatic travel insurance. This is very basic and you should get proper travel i
nsurance anyway. But if you have purchased your airline tickets with your credit card, here are some things that you can expect:

- If your plane is late by 4 hours – free meal in a restaurant (charge to the card)
- If your plane is more than 8 hours late - free overnight hotel stay (charge onto your credit card)
- If your luggage is lost for a few hours – Up to a certain amount (check your conditions) can be charged for clothing purchases on to your credit card (you’ll be reimbursed).
- If your luggage is permanently lost – again, there is a certain amount you can spend on clothing and your credit card issuer will reimburse you for it.

Some of you might think “hey, that’s nothing too great, because an airline will give you meals and accommodation anyway”. In theory you are right, but, although I am confident that most major airlines wouldn’t leave you stranded, I am very sceptical that budget airlines will treat their passengers to a 5-star hotel.

You also get free legal and medical advice on the phone (lets just hope no one really needs this). It’s also good to know that you actually have a bit more to spend should an emergency arise.


Rewards
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You might see these days that there are credit cards out there that give you cash back or rewards. American Express Blue & Egg Visa for example give you 1% cash back on your purchases. This does not really amount to much, but it is still better than nothing. I mean if you spend £10,000 you get back £100. (I guess it works out better if you are on company expenses).

There are also other reward schemes, American Express British Airways credit card gives you BA miles for every £1 you spend (an op on this card coming soon), others offer points where you can get items such as DIY kits, toys, pens, sunglasses, etc.


How does the whole system work?
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Well, if you are thinking that credit card companies actually make money by charging you interest, you are wrong. That is true too, but it is not their main source of income. Each time you purchase any item, the credit card company gets a percentage of the purchase price as commission. This amount differs per credit card company but I believe it is 2% for Visa and about 4% for Amex (if someone knows the actual rates, please let me know)! So, what happens is that say you buy something for £100 on your Amex, £4 goes to American Express. Now imagine how many people around the world have Amex and make purchases with it everyday, and you can get a little bit of an idea about how much these companies make.

Feeling sorry for the poor old shopkeeper? Well, don’t! The extra 4% is always added into the price. If it was not added, then the company tells you that you have to pay a “4% surcharge” for using your Amex. If you pay by cash, that’s 4% extra in Mr Shopkeeper’s pocket.

Using the card
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I am sure everyone knows how to use a credit card. You go to a shop, look out for a VISA/MasterCard/Amex sign somewhere on the door or near the cash register and present your card when making the payment. Always check the amount before signing and that’s it!

Credit cards usually give you an “interest free period”, this means that you buy something today and don’t get charged interest on the purchase amount until 45-55 days later (check your credit card conditions).

You always receive detailed bills and you can “challenge” a purchase if you think you never bought that item or stayed in that hotel, etc. I haven’t had a reason for complaint with a credit card yet, so I am not sure how quickly they assess these challenges.

Try to pay off your debts as quickly as possible. That way you will not get charged interes
t on your balance. Credit cards usually have extortionate interest rates (12.9% for Egg, 18.9% for other Visa’s, some even go up to 22%)!

Best thing to do is to sign up for a credit card, make use of the “interest free” or the “low interest” period and then sign up for another one and ditch your first one! Hey, that does sound like a good idea!

You can always transfer your balance from one credit card to another. For example, if you owe your NatWest MasterCard £700 and you then sign up for Egg Visa, you can transfer that £700 to Egg. What that is in effect is that Egg pays NatWest £700 and now you owe that amount to Egg. The reason you might want to do that is that balance transfers usually attract lower interest rates.

Be careful and always read the small print! Once I was signing up for a credit card which claimed 1.9% PERMANENT low interest rate on balance transfers and I thought it was a good deal. Then I read the small print. It was true that your balance transfer would get the lowest rate ever, BUT any payment you made into the card, would always go towards paying off the balance transfer first.

Example: Transfer £700 into the card. It gets 1.9% interest. Make purchases for £1000. When you pay £500 at the end of the month, that £500 goes towards the balance transfer, hence you now have £200 getting charged 1.9% interest, whereas your £1000 is being charged 18.9% interest. Hence, you are much worse off then you first thought!

If you can help it, don’t use your credit card to get cash out from a cash machine. You will get interest charged immediately at 22% (or more).


By the way, all interest rates I quoted are yearly and NOT monthly.


What types of cards are out there?
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Credit Cards – You get to spend money you don’t have (money on credit!). You will have a pre-set spending limit de
pending on your credit rating. There is usually an interest free period and you can make small, monthly repayments. Main examples are Visa, MasterCard and American Express Blue. These cards do not have to be connected to bank account, hence you can get an Egg Visa even if you only do your banking with NatWest.

Charge Cards – These are usually higher “prestige” cards. There is usually no pre-set spending limit. The card issuer will allow you to spend as much as you show them you can pay back at the end of the month. There is an interest free period but you have to pay the full amount each month. Main examples are American Express Green and Diners Club.

Debit Cards – These are the easiest to get, you only spend your own money. Each time you make a purchase, the money comes straight out of your bank account. Your spending is only limited by the amount of money you have in your account. The examples are Delta & Switch.

Happy spending!

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