Before you take out a credit card, it’s a good idea to familiarise yourself with the charges you might have to pay at some point.
You can avoid some charges by using your credit card responsibly, but there are certain situations in which you might have to pay up.
Below, we’ve listed the most common charges and explained them so you can be sure you’re fully clued up on the potential costs of using a credit card.
While this isn’t necessarily a charge, it’s one of the most important costs you should be aware of when you take out a credit card.
Unless you clear your balance in full at the end of the month, you’ll have to pay interest on what you’ve spent. Just how much you have to pay depends on how much of the balance you clear when your statement is due.
For example, if you spend £250 on your credit card one month – and you’re not carrying a balance over from last month – and you pay off £150 when your statement is due, you will be charged interest on the remaining £100.
Interest is charged on a daily basis. So if you don’t have a balance for the first half of the month, but spend £100 halfway through the month, you’ll start paying interest on this from this day onwards. If you clear the balance, you stop paying interest as soon as you do. You’ll continue to pay interest on any balance you move over from the previous month until you pay it off.
If you clear the balance in full on (or before) your payment due date, you don’t have to pay any interest.
Balance transfer fee
With a balance transfer credit card, you can move over your balance from another credit card – or several credit cards - in order to save money on interest.
Many balance transfer credit cards offer 0% interest for many months on balances you move over. This means you can save on interest if you’re paying high interest rates on your current credit card balances.
However, for moving these balances over, you should expect to pay a fee. This balance transfer fee is typically around 3% of the balance you move over, and you’ll have to pay this for each credit card balance you bring to the new card.
Before you do so, it’s a good idea to work out whether the interest-free period means you will still save even when the fee is taken into account.
Late payment charge
When your credit card first arrives, it should come with information on when your first payment due date is. Later on, when you receive your monthly statement – whether online or in the post – you’ll be told when your payment due date is.
You should always make at least your minimum payment on or before this date. Not doing so means you face a late payment charge and damage to your credit history. This charge can be as much as £12.
Missing even one payment can be tough, as you’ll have to repay what you borrowed, along with the late payment charge and the interest you’re charged on top of that. This is why it’s really important to make sure you make at least the minimum payment each month.
To help prevent this situation from ever happening, it’s wise to set up a Direct Debit to make your minimum payment each month. If you can afford to, it’s better to clear your balance in full at the end of the month, as this way you don’t pay any interest on your borrowing.
Cash withdrawal charge
Taking cash out from a cash machine with a credit card is something you should avoid. Unlike a debit card, you’ll likely have to pay a fee every time you withdraw money, as well as interest.
These charges can be as much as £5 each time you take out cash. And, lenders don’t look too fondly on people who use their credit cards to take out cash often. This is because credit cards generally aren’t designed for withdrawing cash.
Using your credit card to take cash out while you’re abroad can cost you even more. It’s best to avoid this altogether too, although there are some specialist overseas spending credit cards out there with cheaper fees if you need to take cash out abroad.
In the UK, you shouldn’t encounter this kind of fee. But if you travel abroad and spend on your credit card, you may have to pay a transaction fee for each purchase you make.
Your credit card provider charges this to make up for exchanging the currencies.
These charges can be quite expensive, and can quickly rack up to a large bill if you make several purchases. To avoid this, it’s a good idea to look to alternative ways of spending while you’re away.
A special overseas spending credit card might be a good idea if you’re comfortable you’ll be able to repay what you spend on it. These types of cards often have some of the best exchange rates, and many don’t charge you for purchases on them while you’re away – so long as you clear the balance in full at the end of the month.
Another option could be a prepaid currency card. Here, you load the cash on to the card before you leave the country, and can spend on it like normal. Many of the providers of these cards offer ways for you to top up funds on to the card while you’re abroad – and this is often done online now.