Credit cards are a very convenient, but also a very expensive, way of obtaining a loan to make purchases. In effect, the credit card company approves a loan limit within which you can spend money and pay it back at a later date. Any balance is usually subject to a high level of interest rate. Sometimes a fee is paid on top of the interest rate for the privilege of holding a credit card. Even though this is an extremely expensive way to borrow, many consumers are willing to pay the price in order to benefit from the convenience it brings. It takes out of the equation the need to fill in a form or get your bank manager’s permission every time you wish to borrow wthin the limit set by your credit card company.
Since it is one of the most expensive forms of borrowing, it is vitally important that you understand the repayment terms and the costs involved. The bargain that you find in the store and you cannot let slip by, may become an expensive purchase if you purchase using a credit card and do not repay the full balance by the due date. The interest can erode any saving that you make on the purchase price. This is particularly true of no-fee credit cards, where all charges levied are done through the interest rate and so the rate is set at a higher level than cards which charge an annual fee.
To be clear, there are two common fee structures utilised by credit card companies.
* One is to charge the customer an annual fee for holding the card and then an interest charge on any outstanding balance. The annual fee must be paid whether the credit card is used or not but the interest charge tends to be lower than those cards where no annual fee is levied.
* The other is to load all the costs of borrowing onto the interest charged on the outstanding balance, so there is no fee for holding the card. These cards tend to have slightly higher interest rate charges than those cards that also attract an annual fee.
Which type of fee structure that suits you best will depend on how you use the card. If you repay your entire balance every month, then it is likely a no fee credit card will suit you best. If you maintain a reasonable sized balance each month, then the lower interest charged on a fee paying card may suit you better.
Which card you adopt will not depend solely on the fee structure of the provider. Most providers offer a rewards or benefits package with the card. These typically involve insurance cover and an accumulation of points, linked to how much you spend on the card, to be redeemed against goods. These may not be deciding factors, but they can add value to your card and may make using the card for purchases that you can afford attractive. If you pay the balance each month, then your points are accumulating at no cost to you and you can redeem these against future purchases.
Some of the credit cards for which you pay a fee, offer an enhanced range of benefits or an enhanced accrual rate of benefits than the no-fee cards. These can be very useful, such as travel insurance or air miles. If these benefits are enticing to you, they may be sufficient to influence your decision about which provider to obtain your credit card.