CreditCards - Short Guide

there are 100s of crditcard in the market too choose from. Cashback, Low rate creditcards, Balance transfer credit cards. Each of them have their own benefits and costs attached to them. So how to decide which ones to apply? Here is a short guide on credit cards.

Low Interest Credit Cards – Savior or Devil?

Of course, the title is an exaggeration on both sides. Credit cards are neither your salvation nor a destroyer. They are a tool, and how you use that tool is up to you.

It can be used for the sake of convenience, for online shopping and the dozen other uses for which it was designed. Or, it can become a means of increasing your debt to absurd levels and cause you to pay painful amounts of unnecessary interest every month.

Many who let credit card debt get out of control see debt consolidation as the way out. They are often presented with a stack of offers to reduce their credit card debt by consolidating all their debt onto one credit card.

But those offers, though they frequently tout 'lower interest rates' should be viewed with a skeptical eye. Those lower interest rates are usually only available to a select few with very good credit ratings. That doesn't apply to the typical person who is struggling to overcome a history of excessive debt and find a way out.

But, they can offer a way to solve the problem over the long term. You may, in fact, be able to qualify - the only way to be sure is to apply. But even if you're accepted, there are several key items to keep in mind when considering this solution.

Very rarely will such credit card offers lower the actual amount of principal outstanding. As a result, you have exactly the same amount of debt on the day you acquire the new card. And, over the long term you will actually sometimes pay more.

A lower interest rate can, indeed, be a benefit. But lowering the rate doesn't always mean lowering the total amount. If you pay 8% on a debt of £10,000 for, say, five years you will pay more than paying 10% on £10,000 for two years.

The reason is the compounding effect of interest. The total amount of interest paid in the first case is £2165.60. The net interest rate overall is 21.656% when calculated as the percentage paid beyond the principal. In the second case, you pay only £1074.80, with a net interest rate of 10.748%.

Remember the 8% vs 10% are the APR in each scenario – the annual percentage rate, this is the rate for a one year period – not the total percentage of interest.

Of course, the upside is that in the case of 8% over five years, you pay only £202.76 per month, in the second case you pay £461.45 per month. Many will find the former payment easier to manage than the latter. And, you may be able to find some middle ground. Calculators available online will help you run through the different scenarios, in order to guide you to choosing the one that's best for you.

Balance Transfer CreditCards

There are 1000s of people who have outstanding balances on their credit cards and hence are paying interest on those outstanding balance. With balance transfer creditcards they can either benefit from low interest or completely interest free introductory offer. How it works is that many lender offer either low introductory balance transfer rate (i-e may be 3-4% APR for either life of the balance or may be for first 12 months etc) or 0%APR introductory rate on the balance you transfer from your existing card to the new balance transfer creditcard. hence saving you alot of money which you would have paid in interest on your current card.

So for example if you are paying lets say 11.9% APR on your creditcard outstanding balance then why not get a balance transfer creditcard which offers 0% for 12 months balance transfers. Which means you will not incur any interest on the first 12 months on the amount you have transfered to the new card. The only thing you have to be carefull about is the balance transfer fee which is one off and and is paid when the transfer is made from existing card to the new balance transfer creditcard.

Cashback CreditCards

Cash back creditcards are good if you use creditcards frequently for shopping. Each time you use your card you get certain percentage of the shopping amount back into your account. So for example if your card is offering 1% cashback on shopping, then you will get £1 on each £100 spent.This cashback amount can either be paid to you yearly, every 6 months or quarterly etc. and varies from lenders to lender.