Credit card Guides

Explaining credit card terms and conditions

Updated: Thursday 01 December, 2011

By Martin Fagan

We reveal what you need to look out for when reading credit card terms and conditions.

When it comes to credit cards, most people assume the only danger comes from spending more than they can afford each month, and yet the biggest risk could be staring them in the face, albeit in very small print. Providers insist we pay attention to their terms and conditions, though precious few of us heed their advice and actually bother to read them.

To be accepted for a card, you have to tick the box acknowledging that you’ve read the terms and conditions , so you can never plead ignorance if you are caught out by some clause in the 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.

This is a guide to show what certain aspects of the phrase “terms and conditions” actually mean, and what to look out for so you can avoid unnecessary problems.

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• What are terms and conditions?
• What to be aware of
• The good, bad and ugly terms
• Things to bear in mind

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. If you want to avoid falling foul of your provider’s terms and conditions, this is the most important information to get to grips with.

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What to be aware of

Needless to say, credit card providers are there to make money so it shouldn’t come as a surprise 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 traps you could easily find yourself falling into.

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 from you. Most banks now charge £12 (the maximum allowed by law) 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 could 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 or perks (such as free travel insurance) 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 could be wasting your money.

Overseas use

• If you are going abroad, check that your credit card provider doesn’t charge a foreign currency “loading fee” (many card issuers charge 2.99% of the cost of the transaction as “commission”). You can avoid this if you take out a credit card that doesn’t charge it, which is usually a major feature of the card’s marketing strategy and so difficult to miss when researching the market to find the card that’s right for you.

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The good, bad and 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 when you got back to the UK, if you made your purchase using a credit card you are protected under Section 75 of the Consumer Credit Act, meaning that your bank will be responsible for helping you recover your money.

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 a legal obligation - not a privilege - so don’t think that this is unique to your provider.

Each of the main credit card issuers state that they reserve 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, or else apply for another card with better rates.

...the bad...

The financial services industry uses financial terms that can bamboozle the general public, and credit card providers are no exception. Many card issuers refer 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 many issuers’ 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”. You have a legal right to insist your card issuer withholds this information from third parties, but should always 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 access online. In many cases, the phrase “terms and conditions” isn’t immediately obvious. The button to click on the website may be labelled “details” or “important information”, but it may not be on the home page so you sometimes have to delve deeper into the site. However, don’t allow misleading layouts stop you from reading the terms - especially if the card issuer’s website insists you go through a semi-application process just to access the details. It’s beholden on you to read the terms as the card application process assumes you have.

...and the ugly

One of the biggest areas of confusion 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. This is known in the trade as a “negative payment hierarchy”.

Some card providers’ terms and conditions ensure that any repayment made always reduces the most expensive debt first, but you’ll have to read the fine print to establish whether your card issuer is one of them.

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Things to bear in mind

Opting for a card which offers 0% on both balance transfers and purchases for the same amount of time may be a good idea. It can help stop 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 now charge this fee, normally a percentage of the amount you’re transferring to the card (usually 3%). It’s important to do your sums and work out whether switching is still worthwhile once this fee is taken into account.

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

Compare credit cards with Creditchoices.co.uk.

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