Cannot get my head around credit cards

lewis4453

As someone who's only ever had a credit card, despite reading the credit card information on here, and watching YouTube videos, I'm still not sure how they work.

I mainly refer to paying it off "IN FULL" and interest rates.

How I think I understand it is, let's say I have a 20% interest rate (with no 0%), and I purchase something £200, as long as I pay off the "minimum" each month, I will never pay interest. I will only pay interest if I do not pay off the minimum.

Or is the interest on the full balance? How do I know what the "minimum" payment is? And when Martin Lewis says "in full", what is "in full" actually referring to?

Please explain like I'm five. Thank you!

Barkin

When you get your statement it'll show what the minimum payment is, and also the statement balance.

Pay only the minimum, or anything less than the full statement balance, and you'll pay interest.

To avoid paying interest, you need to pay the full statement balance before the due date. 

sausage_time

If you pay statement balance in full and before the due date, no interest is charged.  If you pay less, interest is charged on the whole balance from the purchase date.

You should always pay the statement balance in full each and every month.  Best way is to set up a direct debit to do this.

sausage_time

More detail...

https://www.moneysavingexpert.com/credit-cards/how-do-credit-cards-work/

maman

The way I think of it is that if you don't pay off the balance in full then you are borrowing money from the credit company and so you pay interest at the rate advertised. 

Jami74

"in full" means you pay off the whole lot that appears on your monthly statement. 

Eg. You make a purchase for,£200 on 1st of the month. On 15th of the month you get a statement (should get an email telling you statement is ready to view). Statement will tell you the balance is £200 and due date is 28th of the month and you must pay at least the minimum payment of £5. If you pay the full £200, you won't be charged interest. If you pay £5 you'll be charged interest on the full £200. 

In that example where the statement is produced on the 15th, if you make another purchase on eg 16th, that will go on the following months statement.

cymruchris

Just a little addition to the above. People keep talking about the statement balance.

Let's say you get your credit card on the 1st of January.

You go out on the 2nd of the month and put fuel in the car - £50

You go out to Tesco on the 8th of the month and buy groceries - £50

You have dinner at Nandos on the 10th  - £50

You put more petrol in your car on the 14th - £50

One more trip to Tesco on the 20th - £50

Then on the 25th the credit card company generate a statement. It says your balance is £250 (the total of all transactions above.) It says your minimum payment is £25, and that must reach the account by the 12th of February.

At this point - if you pay the £250 - you pay no interest - that's paying in full. If you pay anywhere between the minimum payment and £249.99 - you will pay interest on the WHOLE of the £250. So even if you pay everything EXCEPT one single penny - you will still be charged interest!

Ok - so carrying on - you're having a busy week, and there's no time to pay the credit card yet.

So on the 28th - you put more petrol in the car - £50.

And on the 30th - back to Tesco - another £50.

It's now the 3rd of February - and you think you'd better make your payment, You open your app - and it says your balance is £350.

That's £100 more than the statement balance you got on the 25th.

So how much do you pay to avoid interest? The £250 on the statement ? Or the £350 current balance?

The answer is - the £250 that was on the statement. So even though that'll leave £100 owing on your card - this will be included in the NEXT statement.

You pay the £250 - the balance in your app drops to £100 - no interest charged. You continue to spend. The next statement is generated (including those two newer £50 purchases) and you do the same thing all over again.

You only ever pay the STATEMENT balance - no matter what your ACTUAL balance is.

And to round all that off - if you set up a direct debit to take the 'statement balance' from your current account every month (i.e. the full balance) - the credit card company will take the right amount every month, and you won't pay interest. This is the best way to ensure the right amount is paid at the right time. You just make sure there's enough money in your current account to cover what you've spent on your card.

lr1277

If you choose to pay the bill by direct debit, most card companies take the money on the due date, or the 1st working day before or after the due date if the due date falls on a weekend or bank holiday. In my experience it has always been the 1st working day after, but I am sure I have seen posts where the money was taken the last working day before the due date.

However be aware, a few companies take the money days before your due date. Thei reason is that if the direct debit fails, you still have time to make the payment before the due date.

You need to read the T's and C's or you could ask the question on this thread and someone might be able to help you out as to whether your credit card company takes the money early.

km1500

when you get your credit card statement it will tell you the balance to pay and by when

this information is usually very clear 

if you pay this amount by the due date you won't pay any interest

if you pay any less or if you pay it late then you will

as mentioned above the best way to achieve this is to set up a direct debit for the full amount

enthusiasticsaver

lewis4453 said:

As someone who's only ever had a credit card, despite reading the credit card information on here, and watching YouTube videos, I'm still not sure how they work.

I mainly refer to paying it off "IN FULL" and interest rates.

How I think I understand it is, let's say I have a 20% interest rate (with no 0%), and I purchase something £200, as long as I pay off the "minimum" each month, I will never pay interest. I will only pay interest if I do not pay off the minimum.

Or is the interest on the full balance? How do I know what the "minimum" payment is? And when Martin Lewis says "in full", what is "in full" actually referring to?

Please explain like I'm five. Thank you!

All the information you need is on the credit card statement which shows account balance, minimum payment and how much interest you will pay if you do not pay it in full.  That is all you need to know. You will pay interest if you do not pay the the FULL balance not just the minimum. 

theoretica

lewis4453 said:

 I will only pay interest if I do not pay off the minimum.

Paying below minimum is worse than that:

Pay the full statement balance - no interest charged, they give you a short period to borrow the money for free.

Pay between Full and Minimum - interest is charged on everything, works as an interest charging loan

Pay below minimum - nasty letters, they may stop you spending more, bad marks on your credit report...