The following article on credit cards has been provided by Moneysupermarket.com

For many people, a credit card is simply a way of paying for something on the spot with a piece of plastic and then settling the charge with a provider at the end of the month.

Close enough – although in fact a credit card is also potentially a highly sophisticated tool you can use not just for instant credit but also to help plan your finances.

To understand how credit cards work, you need to know how the companies that issue them make money from you. There are two main ways:

• The provider makes money by charging you interest on any partial payments. For example, if you fail to clear your balance each month, you will be charged a certain rate of interest on what you owe, this will continue until all your debts are cleared. In addition, you also pay extra charges for making late payments, requesting extra statements and so on. The way charges are applied make a huge difference to the total you owe.
• The issuer also charges suppliers of products and services that you pay with your card. This fee, a percentage of the total amount you spend, is one reason why the issuer can afford to let you have a “free” card as long as you settle your bills within an agreed limit, usually about 54 or 56 days.

Something that is becoming increasingly popular amongst credit card issuers is to charge a small percentage of the amount people transfer to their cards from other issuer’s cards. This is especially true with issuers that offer 0% interest cards for a certain period.

Interest is usually charged at an annual percentage each year and described as the APR. This can vary from 0% on introductory offers to a more common range of between 15% and 18%.

The interest charged is broadly based on what you owe. So if you owe £1,000 and pay back £500, the next month’s interest will be based on the lower sum.

In this respect, cards are a potentially more transparent source of credit than loans, where the rate of interest is set at the outset and is based on the total sum owed. Equally, at present the interest on loans is cheaper.

There are, however, two potential issues that card users need to be aware of, which will be explained in more detail later.

Most card issuers calculate the way they apply interest on a so-called “payment hierarchy”.

• For example, withdrawing money with a credit card from a cash machine often attracts a much higher rate of interest than buying, say, a meal. The hierarchy means that the least costly debt, in this case the meal, is paid off first. It is then followed by the more expensive cash withdrawal.
• For those who don’t pay off their debts in full, issuers apply interest on their cards at different points in the spending “cycle”.

For some credit cards, it is at the point of next purchase. For others it is when the statement is prepared. Others may charge form the moment it is sent out. These different ways will impact significantly on what you are charged.

Continue to What credit card might suit you best?.

You can find more information and easily compare over 300 credit cards at Moneysupermarket.com for free.