Credit card Guides

Explaining credit card terms and conditions

We show you what you need to look out for when reading credit card terms and conditions… (Updated 29/10/09)

When it comes to credit cards, most people assume the only danger comes from spending more than you have each month, and yet perhaps the biggest risk is staring right at you. Every provider insists that you pay attention to their terms and conditions, although precious few of us actually heed their advice.

Terms and conditions must be accepted for you to get a card, so you can never plead ignorance if you are caught out by some small print you failed to read. Put simply, you can’t say they didn’t warn you: it’s all there in black and white.

Pitfalls remain however, and this is a guide to show you what you’re looking at, and what to look out for so that you can avoid any unnecessary problems.

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• What are terms and conditions?
• What to be aware of
• The Good, Bad & Ugly terms
• Our recommendations

What are terms and conditions?

Typical terms and conditions will contain the key details of the credit card you are interested in acquiring. While each provider will draw attention towards terms that are specific to them, all will contain the vital information, including the credit limit, the APR % and the minimum payment rate per monthly bill. This is the most important information for you to evade being a victim of your provider’s terms and conditions.

What to be aware of

Needless to say, banks are there to make money so it shouldn’t come as a surprise to find that they are looking for ways to get some from you.

If you don’t pay off your monthly bill in full you are treading a potentially hazardous route, as you become subject to the stipulations you have agreed upon within the terms and conditions. These aren’t strictly ‘tricks’ per-say, as you agree to them before you sign up, but if you don’t pay attention these can turn into financial potholes.

Interest rates

• If you are not able to pay off your bill each month, you must be aware of the interest rate charged by your provider. Particularly worthy of mention are introductory interest rates that last for a set period of time such as 0% purchase or balance transfer deals. Once the introductory rate has finished, the rate you pay can jump significantly.
• Credit cards are increasingly advertised with a ‘Typical APR’, which may or may not be the rate you receive if the provider doesn’t consider your credit history to be to their benefit. Make sure you understand exactly which rate you have accepted, as the printed rate may not be the one you receive.

Repayments

• You need to know when you will be required to pay off the outstanding amount. If you don’t pay attention to the date, this is an easy way for the provider to make a bit more money off of you. Most banks now charge £12 for late payment or for going over your credit limit, and this importantly contributes towards a bad credit rating.

Your credit limit

• Know the spending limit. If you are a reckless spender, you can easily exceed this and incur additional charges. As you will have accepted the terms and conditions, if you don’t pay the money (or at least the minimum amount) on time, you are breaching this agreement and will face an extra charge. If you know roughly how much you spend each month, ensure you get a credit card that matches your usage needs.

Fees

• Watch out for compulsory fees charged by your provider for some cards. This includes an annual charge for using their ‘premium’ cards. If you don’t require the extra spending limits offered, then don’t pay extra for it. Know your usage.
• Don’t be lured in by attractive perks offered by certain card providers. You may find yourself paying an annual rate for using such a card, but if you don’t really need the perks offered, you are wasting your money.

Overseas use

• If you are going abroad, check that your credit card provider doesn’t charge a foreign currency ‘loading fee’ (e.g. Alliance and Leicester charge 2.99% of the cost of the transaction as ‘commission’). You can avoid this if you take out a credit card with the either the Post Office or with Nationwide, as both don’t charge this extra fee.

The Good, Bad & Ugly terms

The Good

Since March 2004, credit card providers have used a standard format for presenting all the relevant information, from APR percentages to late charges and minimum repayment amounts. This information is displayed in a “summary box”. While not intended to replace the full terms and conditions, they ensure that most of the key information you need is made completely clear, so that any potential mistakes can be avoided. They also help you to directly compare credit cards between providers.

If you’ve ever bought goods abroad and found that they are faulty, you are protected under Section 75 if you made your purchase using a credit card, meaning that your bank will be responsible for helping you.

All credit cards are covered under the Consumer Credit Act of 1974, which guarantees that in the event of fraud your money is protected. This is an obligation, not a privilege so don’t think that this is unique to your provider.

Each of the main banks state that they hold the right to change interest rates and charges. To help with clarity, the Banking Code requires your provider to give you between four and eight weeks notice when these changes occur or if you are approaching the end of an introductory offer period. This means you will know when your interest rates will go up to the standard rate, and can adjust your spending accordingly.

The Bad

Banks like to stick to financial terms that can bewilder the general public. NatWest refers to a monthly and annual rate of APR, with the latter broken into a potentially confusing simple or effective rate. If you don’t understand the difference, or indeed any other part of what you are agreeing to, speak to someone at your bank who can explain it to you.

Be careful of how banks use your personal information once you have taken out a credit card with them. Buried deep in Alliance and Leicester’s terms and conditions is a caveat explaining that “credit reference and fraud prevention agencies will also use personal information for statistical analysis about credit and insurance fraud”, meaning that your personal information is sent out to external agencies without your approval. You have a legal right to this information, and should check to ensure you truly agree to their terms before you commit to getting a card.

Sometimes the terms and conditions can be unnecessarily difficult to reach. On the HSBC credit card application page, you have three tabs ‘Overview’, ‘More info’, and ‘Apply’. Only when you click for ‘More info’ does the mysterious fourth tab ‘Conditions’ appear – don’t allow misleading layouts stop you from reading the terms!

...and the Ugly.

One of most misleading problems stems from the use of the term ‘interest-free’. If you have debts and are thinking of switching your balance to another provider, be careful as this isn’t necessarily as good as it seems.

Often they come equipped with an attractive short-term interest-free offer on new spending. Beyond encouraging a spending spree, the real danger comes from the fact that you will have to pay off your previous debt before you can pay off your new purchases, meaning that it sits gathering interest (after the initial short-term interest-free rate) until you can pay off everything.

Abbey came under fire earlier this year for exactly this, but you are held responsible if you accept the terms and conditions. Nationwide is one of the few providers to ensure that any repayment made always reduces the most expensive debt first.

Our recommendations

Opting for a card which offers 0% on both balance transfers and purchases for the same amount of time can be a good idea. This stops borrowers falling into the “interest-free” trap as outlined above.

If you’re switching a balance to a 0% balance transfer card, check if there is a balance transfer fee. Most cards charge this fee, normally a percentage of the amount you’re transferring to the card. It’s important to do your sums and work out whether switching is still worthwhile once this fee is taken into account.

Most importantly, we recommend that you always read the terms and conditions specified on your card before you sign up, as to be forewarned is to be forearmed. If you don’t understand the specifics of the terms, then don’t be afraid to ask for an explanation.

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