Welcome to the latest in our series of blogs on money saving tips. In this article we’ll share a few ways you can save money with your credit card. We’ll also give a brief overview of what a credit card is for and how they work.
How do credit cards work?
Credit card companies make money by charging sellers a fee for transactions. They also make money from the interest and fees they charge you. A credit card gives you access to funds you would otherwise not have. Interest is added if you do not pay your debt off. There can also be fees for certain transactions such as using your credit card abroad.
Why have a credit card?
Credit cards, when used correctly, are a helpful financial security for managing bills and payments. They are ideally used in emergencies. For example if your car breaks down and you urgently need to pay for a part to fix it. If you would otherwise have to wait until pay day to buy the part, a credit card will give you access to the funds to buy the part sooner. Then, on pay day, pay the debt on the credit card in full.
Other benefits are spreading the cost of a large purchase over several months, protecting purchases and managing existing debt.
Problems can occur when someone cannot afford to pay off the debt on their credit card and the interest and debt escalates. If you’re experiencing difficulties paying your credit card back, reach out to Citizens Advice for help.
How does credit card interest work?
When you use your credit card, you are borrowing money. This borrowing comes will an expectation that if you do not pay it back within a certain time frame, you will be charged. The charge is known as interest. The amount of interest you will be charged is calculated as a percentage of the amount you borrowed. This is known as an interest rate. The higher your interest rate is, the more expensive it is to borrow the money.
Interest is calculated daily and added to your credit card statement each month. When you pay back what you’ve borrowed, you will have a minimum amount that has to be paid. You can choose to pay more than the minimum amount. If you do not pay the minimum amount, your interest rate will add a percentage of extra money to repay on top of what you owe. That means you’ll have more debt than you had before.
Tips for saving money
- Aim to always pay back what you owe within the timeframe the credit card company specify. Set up a direct debit to always pay an amount into your debt so you don’t forget a payment.
- Avoid signing up to credit cards that have a monthly fee or mandatory spend.
- Sign up for a credit card that gives 0% interest for a certain amount of time and then pay back what you owe before that time is up.
- Read the terms and conditions carefully and make sure you understand how much interest you’ll be paying, if you only pay your minimum amount back. In some cases, you can end up paying more in interest. If you can’t pay the full amount back, pay the minimum amount to make sure you don’t earn more in interest.
- Pick the right card for what you plan to use it for as some cards may reward you for making certain purchases.
Choosing a credit card wisely and keeping on top of your debt is the best way to handle a credit card. If you understand the terms and conditions, take advantage of offers and manage repayments efficiently you can avoid paying interest and save money. This will make your credit card a helpful tool for financial health.
If you’re looking for advice about mortgages get in touch with us.