Credit Card Trap

Queens are not exactly known for their restraint when shopping on the high street. We are undisputed champions of indulgence and regarded by society as hedonists who seek pleasures at any price. We are rapidly approaching the time of the year that the potential for spending reaches its peak. I'm sure that many of you will be spending today, at the expense of your standard of living tomorrow. Credit Card Companies, Personal Loan Lenders and Major High Street Stores will all be encouraging you to buy goods on the never never.

Before applying for any credit card or loan you should know the implications of your actions. How your interest is calculated and most importantly the amount of time your debt will take to pay back.

How Interesting?

Annual percentage rate (APR) was introduced by the government in 1974, it's an attempt to force all lenders to quote the true cost of borrowing, by including all the associated costs of setting up a loan or credit facility. These costs include annual account fees, initial charges and any redemption fees. The APR therefore is always going to be higher than any flat interest rate that you may be quoted.

Some forms of credit are more expensive than others. If you decide on applying for a card from your favourite store then you are likely to pay more interest than a standard Visa credit card. If you take a structured personal loan then the interest rate is likely to be reduced further. Store cards generally charge annual rates anything up to 25%, with credit cards between 13%`and 17% and personal loans likely to work out around the 10% mark.

Some cards offer a special introductory rate to attract applicants. This rate will be for a limited time only and revert back to the providers standard rate soon after. It has been known for some of the new Internet banks to even offer interest free credit cards to entice you. There is nothing wrong with taking advantage of these offers if you are the type of person that will remember to keep switching your outstanding balances. The minute you forget to move your liabilities you will only be paying back any advantage gained. In the long run it's probably better to find a mid priced lender who is aiming to maintain a steady rate and is less inclined to offer gimmicks.

Most credit and store cards allow an interest free period on any purchases that you make. This means that you have time to repay the debt before incurring interest payments. These periods of grace can vary but are normally between 45-55 days. If you are disciplined enough to clear your card within this period then cards can be a convenient method of interest free shopping. If you decide not to repay the whole outstanding amount then you will be asked to pay at least the minimum payment. This can be anything from 2.5%-5 % of the total balance.

Once your time is up, it's important to know how interest is debited from your account, this could be monthly or daily. Daily interest places you at a distinct advantage, as any reductions in your outstanding liability are immediate. You therefore pay less interest overall.

Additonal Costs

Some cards may charge less interest but carry hidden charges. They may debit an annual fee from your account. This will be within the small print but many people fail to check. Annual account fees can be as much as £50-£100 per annum.

Other fringe costs could be linked to insurance products such as a Payment Protection option. Unemployment, Accident and Sickness cover can amount to a substantial increase in your overall annual charge for credit. These policies are designed to take up your monthly payments for 12 months following redundancy or incapacity. You should check the terms carefully before signing up for this kind of cover, as some policies have a deferred period before benefit, or may not pay out if you are a temporary contract or if you're self employed.

Pay Back Time!

It doesn't matter how you borrow money during expensive time like Christmas and the January Sales, the fact is you're going to have to pay it back. You should consider this before committing yourself. If you borrow £1,000 over the next two months you may well have a great time but on a store card at 25% APR this amount will take you 26 months to clear if you pay £50 per month. If you borrow on a credit card at 15% it will take 23 months and on a personal loan it will take 22 months.

As credit cards are open forms of borrowing, the temptation is always there to run up your balance, as the card is always in your wallet. You should be aiming to repay seasonal debts within 12 months, as you will only create further problems for yourself in the future. If you have to borrow, then take a 12-month personal loan, as the structured repayments will ensure the debt is paid off in time for next year's celebrations. A loan at 10% interest would cost you £87.50 per month.

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