Credit cards are a popular way of making everyday purchases from groceries to luxury items and can insure you against the risk of credit fraud but credit card costs are not always as straight forward and can leave consumers with a financial headache. We have prepared an overview of some of the obvious and hidden costs associated with credit cards and some helpful suggestions to help you save money.

1. APR (Annual Percentage Rate)

When selecting a credit card how many times have you simply chosen the most popular type or those you have seen advertised in the media? Perhaps you chose the same credit card as a spouse, partner or family member or friend because you are familiar with it, or noticed that it offered additional credit fraud protection. What most people do not realise is that it pays to shop around and yet we rarely do. Some credit cards charge higher rates than others which will have a major impact upon your finances, especially if you don’t pay your bill outright at the end of each month. As long as your chosen provider is either a visa card or mastercard that is all that matters as these symbols are universally accepted across the globe.

If I told you that a top of the range television was for sale for £2,000 but that just down the road you could get it for £1,800, most people would quickly choose to save £200 and make the short walk to the store. This principle also applies to credit cards and yet because the money does not physically pass through our hands we sometimes opt for the worst option because of the complexities of credit card terms and conditions and not taking the time to read the small print.

APR is the gross amount of compound interest charged if no repayments are made. It is essentially the price that the financial service company places on lending you money and enables loans to be compared on a like for like basis. So for example an APR of 17% would mean that you would be charged £17 per £100 borrowed unless, you were to pay off your credit card the end of each month. This means that if you regularly spend £1000 per month on your credit card and fail to pay it off at the end of the month you will be charged approximately £14 per month in interest charges if the APR was 17%.

By law all financial institutions must inform you of their rate of APR before you take out credit with them and reputable visa credit card companies or mastercard credit card companies are usually good at making this clear. The Golden Rules are:

- The lower the APR the better as the cost of borrowing will be cheaper

- Ensure you choose a card with the lowest possible APR and don’t just accept the first one available.

It should also be noted that credit card companies often charge a higher APR rate for cash withdrawals via your card so read your small print and don’t presume it is the same APR rate.

2. International Charges

The main benefit of credit cards is the fact that they are universally accepted in most countries across the globe and yet credit card companies often fail to explain clearly the variable costs involved.

If you use your credit card outside your own country you are liable to pay an additional charge for the privilege which varies from company to company but is usually between 2-5% of the transaction cost. So buying that Ming Vase on a trip to Europe may be more expensive than you think. Credit card companies claim that it is the cost of processing these transactions in another country, but this doesn’t hold up well given that most big credit card firms are likely to have offices based in most countries, that could easily process the transaction with minimal effort.

Money Saving Tip: Check out the international charges that will apply to your credit card before you travel and don’t just presume that the same interest rate will apply.

3. Balance Transfers

A word of warning about the costs of balance transfers. These were introduced to entice customers to a different credit card company. The company offers you between 6-9 months of 0% interest on your existing debt in exchange for you changing to their credit card. This is hugely tempting for many people however there are some pitfalls to it.

a) You will only get 0% APR on your existing debt. Some people wrongly assume that they will not pay interest on any new spending on their credit card for the 6-9 month period but this is incorrect. So don’t transfer your £3,000 credit card debt hoping you won’t have to pay interest on it for 6-9 months!

b) Always check the APR that your card will revert to after the balance transfer period, as it could be that it is higher than your current credit card provider meaning that you pay more interest in the long term.

4. Late Fees

Late fees are also associated with credit cards if you fail to make at least the minimum payment required each month. These can vary between credit card companies but usually come in at around £20 although they can be as high as £35. It is important to remember that these fees will be added to your outstanding balance and will therefore be subject to interest. If you are concerned that you might not be able to make a payment within the agreed timescales it is always worth calling the credit card company to discuss the matter or speak to your local citizens advice bureau located in most towns or cities.

5. Over Limit Fees

These are fees that you will be charged if you go over your credit card limit without agreement. Most companies will charge you a 1.5% handling charge for this and like late fees the charge will be added to your outstanding balance and have interest charged on it.

Summary

Credit card costs are rarely straight forward, but some basic research and asking the right questions can reap huge savings in the long term. We have explored the huge differences in APR rates and the importance of verifying the cost of using credit cards abroad. Finally we have examined costs linked to late payments and the consequences of going over an agreed credit limit. Just remember that it is best to shop around before you make your final decision, but just ensure that either the visa card or mastercard symbols are on your final choice.

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