A credit card can be defined as any card that may be used to repeatedly borrow money or buy products and services on credit - it is a flexible form of loan that lets you choose the amount you borrow (subject to an upper limit) and the speed at which you repay the loan. The most common forms of credit card are:

The bank credit card - the typical Visa or Mastercard issued through the high street banks and other lenders. Frequently available with a range of special offers, including introductory discounts, cashback and loyalty schemes.

The store card - a credit card issued by, and only letting you make purchases through, a single retail outlet. These cards often give some form of shopping benefit, but at the expense of a higher interest rate.

The affinity card - a credit card that allows you to show your support for a charity or other organisation (e.g. RSPCA, Chelsea FC, etc) - and that often contributes part of your interest payment toward the organisation.

Credit Cards Charges and APR

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Credit cards vary extensively in the charges that they levy on the user and it is important that you are aware of them before taking out a new card.

Interest payments - this is the amount of interest that you pay for the privilege of borrowing money from the lender. The rate is typically around 15.9% for a bank card and anything between 18-30% for a store card - but these rates vary heavily!

If you pay off your card in full you will not usually be charged any interest - giving you an interest free loan of anything up to 59 days.

But if you don't pay off the card in full you will be charged interest on the outstanding balance, either from the statement date or from the date of each purchase - this rule varies from one card to the next.

If you withdraw cash on your card you will generally be charged interest from the moment of the withdrawal.

Late payment charge - a penalty for not making a payment by the date specified on your statement - typically £10-£25. And remember to make your payment at least 5 days before the cut-off date to allow for the bank to clear your payment in time!

Minimum monthly payments - not strictly a separate charge, but the minimum amount of interest you must pay each month - typically £5 or 3% of the outstanding balance, whichever is the greater.

Exceeding your credit limit - another penalty, again typically £10-£25.

Annual fee - fortunately now a rarity on standard bank cards, but still applicable to 'premium cards'.

Overseas usage charges - some card companies add an additional 1-3% fee to overseas purchases - check very carefully if you plan to use a card on your travels.

Credit card cheques - finally, be very wary of using credit card cheques, as they usually incur higher interest charges on purchases, additional admin fees and cut out the interest-free periods entirely.

APR

Every credit card is obliged to state its charges in the form of an 'Annual Percentage Rate' (APR) in order to assist you to make comparisons between different cards. An APR takes into account:

the interest you must pay,
any fees that you must pay,
when and how often you pay the interest and any fees.

In effect, the APR is supposed to provide you with a comparative figure for the total cost of each different card over a full year.

In reality, different card providers use different figures and time periods to calculate the APR - they may or may not include special offers in the calculations and certainly don't include penalty fees.

So don't take these figures as gospel, but use them as a good indication for comparative purposes.

Credit Cards Special Offers

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Many card issuers now offer special, low introductory interest rates, 'cash back' schemes and rewards programs to lure customers away from their competitors.

Whilst most of these offers come with strict conditions and limitations, they are definitely worth looking at if you are going to be using a card anyway.

Introductory rate offers. These offers apply to both new purchases and/or balance transfers and typically include up to 9 months interest free credit.

Offers relating to balance transfers do not usually apply to any new purchases you make on that card. And any repayments are set first against the transferred balance, not against new purchases, so you might not get the full benefit of the interest free period if you continue to use your card.

However, the card companies are beginning to suffer at the hands of the 'rate tarts' who regularly switch their balances between credit cards in the pursuit of free credit - many lenders are now introducing 'balance transfer fees' to recoup their costs.

'Cash back' cards. There are a few cards offering 0.5-2% cash-back on your purchases, which can make a lot of sense if you spend heavily on the card and pay it off in full every month.

Loyalty schemes & reward programs. These entail earning 'points' for every £1 you spend on the card, which can then be redeemed against gift catalogues or other products. The value of these schemes is often low, but they are better than nothing if you are going to use the card anyway!

Credit Cards Benefits

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Aside from convenience and flexibility, there are a number of other standard benefits that come with a credit card. You should certainly be aware of them - it's nice to use them if you can! - but also be aware of their limitations:

Extended warranties on household appliances - to protect your electrical purchases for up to a year after the manufacturer's warranty expires.

Price protection - to refund the difference should you purchase an item and then find it cheaper elsewhere.

Purchase protection - to reclaim the cost of lost, stolen or damaged goods. If there is a delivery problem or the goods are faulty, then your card issuer has joint liability with the supplier of the goods - and you can therefore seek compensation from the card issuer if you get no joy from the supplier.

Travel accident insurance - pays out a lump sum if you die or are seriously injured on a trip, but check the limitations. This cover typically protects you whilst travelling to your holiday destination, but not for the time you actually spend there.

Payment Protection Insurance - an additional insurance to protect your card repayments in the event of accident or redundancy. But it can be expensive, so check the wording carefully to ensure that your circumstances are likely to be covered.

Card Protection Plans - another additional insurance to insure you against unauthorized charges on your card and to notify your card issuers in the event of your card being lost or stolen. Again, this is expensive and offers little that you can't do yourself for free.

How to Choose Credit Cards

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There are a lot of small differences between credit cards - often hidden in the small print. Particular areas to check are:

Interest rates - what rate are you actually going to be charged? In addition to the discounts and offers, many card issuers offer different rates to different customers using a 'price for risk' model, whereby wealthy customers get given a cheaper rate than those less well off!

Interest free periods - cards vary between offering 25 - 59 days.

From what point is interest charged? If you don't pay off your balance in full, you will start incurring interest on your balance. Some cards start charging from the date on your statement - others charge from the date of your purchases.

Fees - what fees are you likely to incur - annual fees, missed payment penalties, etc? Look for a fee structure that fits your spending behaviour. The next section - Your Profile - illustrates some of the more common customer profiles and suggests the type of card you might look for.

Credit Cards Your Profile

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To get the most out of a credit card you should try to match your spending and repayment habits with the credit card features:

"I only pay off the minimum each month".

If you pay only the minimum amount each month, it can take a very long time to pay off a credit card bill.

For example, suppose you have a debt of £1,000, interest is charged at 18% a year and you only pay off a minimum 3% (or £5 if greater) of the outstanding balance each month. It will take you 13 years to pay off the whole balance and your repayments would total £1,772.

You would be better off transferring this balance to a new credit card offering 0% balance transfers and put any additional spending on a different card. This will allow you to get maximum benefit from the interest free period and pay off more of the loan instead of just interest. (Or perhaps take out a personal loan that comes with a cheaper rate?)

"I spend, but rarely, if ever, clear my balance at month-end"

Sounds like you would benefit from having a 0% introductory period on purchases and maybe a 0% period on balance transfers too. Either look for a single card with a dual offer or perhaps get a couple of cards - one for spending and paying off in full and a second card offering 0% for your outstanding balance.

"I usually clear the balance every month…"

…so no point looking for a balance transfer period. You would be better off looking for a card with no annual fee and a low standard rate of interest to keep your payments low in those difficult months. And perhaps a 'cashback' or reward scheme if you can find one.

"I always clear the balance in full every month"

Lucky you! So the interest rate charged is going to be irrelevant. Choose a card with no annual fee and decide whether you'd like to earn a reward or cash back, but ensure the scheme on offer gives you a worthwhile return on your spend.

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