From credit ratings to cashback, credit card jargon can often seem baffling. Here are the answers to 10 frequently asked questions.
1. How do card companies decide whether to give you credit?
Everybody has a credit rating, which shows lenders how much of a risk you are to lend money to.
This information is given to card providers by three main agencies - Experian, Equifax and Callcredit.
How much credit you’ve had in the past, whether you repaid it on time, and how much credit you can access now all play a part in shaping your credit rating.
Not only do card companies look at this when deciding whether to offer you loans or cards, but it can also influence how much you’re offered and the rate of interest you’ll pay.
2. Do you always have to pay interest on your credit card?
No. If you pay your balance off in full and on time each month, you normally won’t be charged interest.
Also, many credit cards come with introductory interest-free periods on transactions such as purchases and balance transfers.
So as long as you pay off your balance before the 0% period ends, you won’t pay interest.
3. How do providers make money when not charging interest?
Each time you use a credit card to buy something or take out cash, the card provider usually charges a transaction fee.
Many credit card providers also rely on cardholders being lazy and not switching cards at the end of 0% deals.
And if you have an outstanding balance on that card, you’ll start to pay interest.
4. What’s the difference between a store card and a credit card?
Store cards are available from many large retailers, such as Dorothy Perkins and Topshop.
Essentially they work in the same way as a credit card - offering you access to a credit facility and charging interest if you fail to pay off an outstanding balance.
However, the crucial difference is that you can only use a store card with the company that has provided it.
So if it’s a Dorothy Perkins store card, for example, you can only use it at Dorothy Perkins.
Store cards typically come with introductory money-off offers, but interest rates are often much higher than on credit cards.
5. Why do some credit cards offer cashback?
All retailers give credit card providers commission if you use your card at their shop.
And, to entice new customers, some providers share that commission with cardholders in the form of cashback.
Cashback cards don’t often come with interest-free deals.
So to guarantee that any cashback benefits aren’t outweighed by interest payments, make sure you pay off your bill in full each month.
6. How is a prepaid card different from a debit or credit card?
A prepaid card is a card that you have to load with cash before you can use it - you can never spend more than you have on the card.
A credit card on the other hand gives you access to a credit facility, which you then pay back.
7. Can you withdraw cash using a credit card?
Yes, although withdrawing cash on a credit card can be much more costly than using a debit card.
You’re usually charged a cash withdrawal fee by your card provider, plus interest from day one at an average annual rate of 29.9%.
So if you use your credit card at an ATM, you will usually have to pay interest even if you clear your balance in full at the end of the month. You’re much better off sticking to your debit card.
8. What’s the difference between Mastercard, Visa and Amex?
Mastercard, Visa and American Express (Amex) are all companies that process the payments between the banks of the credit card provider and the retailer where the card is being used.
Some, mostly smaller, retailers do not accept Amex cards - this is explained below.
Otherwise, to the person using the card, there’s very little difference as you use your card in exactly the same way, irrespective of whether it’s Mastercard, Visa or Amex.
9. Why do some credit card providers give you two cards?
Reward credit cards – those that offer perks such as airmiles or shopping points - sometimes come with two cards, typically a Visa and Amex card.
Amex charges retailers higher fees for processing transactions, which often means it can offer increased rewards to customers.
However, because of the increased fees, some retailers prefer not to accept Amex.
So, to make sure you can still use the card and earn rewards, some providers will also send you a Visa card as is it more widely accepted (but may earn lower rewards).
10. What is a joint credit card?
There’s actually no such thing as a joint credit card.
Only one person can be the account holder, but he or she can then give supplementary cards to another person, such as their partner.
But paying off any debt incurred is still the account holder’s sole responsibility.