Unless you're lucky enough to be in One Direction, have royalty in the family or be a genius with a really well paid job, the chances are that you're pretty skint right now. Being errr... 'financially unstable' is unfortunately just a fact of life for most young people these days, and the struggle is oh so real. Preach.
So that's why more and more people are turning to credit cards to help 'em out financially. But how much do you ACTUALLY know about them? Is it a good idea for you to get one? And generally, just what is the deal with getting loads of free money?
Team Sugarscape didn't have a bloody clue to be honest, so we've done loads of research to compile a simple, non-boring, fuss-free lowdown of what credit cards are all about. Oooh, so grown up.
So what actually is a credit card?
Very simply, a credit card lets you buy things on credit – meaning that
you don't need to have the money upfront to pay for purchases. If big or unexpected purchases are needed, a credit card can be handy to help cover the costs.
A credit card can be a convenient way to pay for almost anything from a new pair of shoes to a holiday - but what you must remember is that a credit card is a type of LOAN. It ain't free money. When you spend on a credit card you are essentially borrowing – and if your debts get out of hand you could end up in big trouble.
How do they work?
When you apply for a credit card, you apply to borrow money from the card issuer - usually a bank, although a huge range of companies offer their own cards. They look at your credit history before you're accepted, and if you have a low credit score you could be refused credit (more about that in a bit).
If you get the thumbs up, the bank will set a credit limit for you, which is the maximum amount you can spend on the card.
The card company will send you a statement every month, detailing the transactions you've made on the card, plus anything extra that you've accumulated in interest or left over from last month. They'll tell you a minimum payment which you MUST send, as well as the payment due date.
What's the big deal with 0% interest?
Some credit cards charge zero per cent interest for certain period of time, but the standard rate is about 16%. However, if you play your cards right then you should never pay a penny in interest. Most credit cards come with an interest-free period of about 56 days.
In other words, as long as you clear the balance in full when you receive your monthly statement, there is no interest to pay, aka not a penny more than you've actually spent. That's the clever way to do credit cards y'see.
What if you can't afford to pay the full monthly balance?
If you cannot afford to clear the outstanding balance in a month, you will start to gather interest on your total – and that's where the debt could quickly spiral out of control.
You must pay at least the minimum payment each month (set by the card company), but try to pay as much as you can possibly afford. If you make only the minimum monthly payment, they'll charge you a percentage interest for keeping their money, so it could take YEARS to clear the debt as it'll just keep snowballing.
If you miss a monthly payment or even just make your payment later than the monthly deadline, you'll probably have to pay a penalty charge too. There is also a penalty if you exceed your credit limit, so it's important to be in control of your credit card, monitor your statements and generally know what's going on with your money.
And if you are running into problems, contact the card issuer immediately. DON'T ignore it. It WON'T go away.
It's not really for cash withdrawals
You can use your credit card to withdraw cash from an ATM, but errr... probably don't. There is usually a fee (yep ANOTHER one) for cash withdrawals, and the rate of interest is typically higher than the standard rate on the card. Plus there's usually no interest-free period, so the cash withdrawal will start to rack up interest immediately. Ugh.
WTF does 'APR' mean?
Credit card providers' terms can vary widely and it can be difficult to compare cards
to one another - so that's where the annual percentage rate comes in.
The APR looks at the annual interest that will come when you're
borrowing a set sum, and also any charges such as upfront fees that are involved when you sign up to the card.
Comparing the various APRs can help you to decide which of the many credit
card deals out there might be best for you, depending on what you want to use the card for. Credit card comparison sites will also narrow down the choices for you, which is handy.
What's a credit rating all about?
When you apply for a credit card, the company will take a look at your official credit file, which details of your financial history. The bank or building society will then be able to find out whether you have a mortgage, how much you owe on credit cards and whether you have missed any payments in the past. The credit report helps the bank to decide whether or not to approve your application for credit – and on what terms.
It goes without saying that the best way to improve your credit rating is to manage your debts. Don't miss monthly payments, stick to the payment deadline and stay within your credit limit.
But errr... I haven't ever built up any credit history.
DON'T PANIC. If you have no credit history or a poor credit score, you can build up your rating by taking out a credit card aimed at people in that exact situation. You can then prove to a lender that you can manage your debts sensibly and so improve your score. Just remember that the interest rates on credit cards for people with low credit scores are usually higher than the average.
Buzzwords to keep an eye out for:
You may spread the cost of a large purchase with a card
that offers 0% interest on purchases.
The interest-free period begins from the date you open
the credit card, not the date you first use it.
You get more protection if you pay with a credit card than if you pay with a debit card, cash or cheque. If you buy something between £100 and £60,260 you will get your money back if it all goes wrong. For example, if you book a holiday and the company goes bust, you can claim the money back from your credit card provider. It's a pretty good bonus.
Extended interest-free periods
Some credit cards offer 0% periods aka. an interest-free loan, although you need to clear your balance before the 0% offer ends otherwise you'll be charged interest. The average interest rate is 16-18% - that's quite high which is why you should pay ALL your debt off each month before interest kicks in.
Some cards even offer bonus incentives to spend, such as cashback, loyalty points, store rewards or air miles, which means you could actually get PRESENTS for using your credit card. These are only worthwhile if you pay your bill in full – otherwise the interest you'll be charged will be more than the value of the rewards and that's a waste of time.
If you already owe money on credit or store cards, taking out a new card can actually be a good option. You'll probably be paying interest rates of at least 18% on the first card, but you could cut that to zero by transferring your debt onto a 0% balance transfer card. Sounds confusing, but it's not. There will be a transfer fee to pay of around 3%, but it's worth it as it will still be less than the interest you'll be charged if you stick with your existing card.
Pay your debt off before the end of the 0% period though, as you will then be charged interest on any debt you still have, and just remember that 'card tarts' (aka someone who does transfer after transfer) gain a bad credit rating. Gah.
So basically, in a nutshell, in conclusion etc...
If you don't pay off your balance in full each month, you will start to rack up interest at a relatively high rate. Your debt can therefore quickly spiral out of control, so just always try to pay more than the monthly minimum (ideally the full amount each month) and think of it as a SHORT-TERM borrowing method.
Realistically, credit companies profit massively off 20-somethings that don't bother to understand how credit, interest, and debt work. Never charge something to your card unless you have the cash to pay it off, never carry a balance on your card, and pay your bill on time or early. Treat your credit card like cash and don't plan to live on credit. The end.
We're hoping that's been vaguely helpful, but if you want to find out more about the ins and outs of getting a credit card, moneysupermarket.com is SUPER helpful.
What do you reckon to all of this then? Considering it? Let us know and we can have very grown up conversations over on Twitter @Sugarscape.
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