Do you know how much your credit card is costing you?

One in five people have a limited understanding of how their cards work

Do you know how much your credit card is costing you?

Are you among the one in eight (13%) who doesn't know how much interest you're charged on your credit card? Are you confused by terms like 'interest free' or 'balance transfer'? If so, it's time to make sure you understand the real cost of your borrowing.

A new survey suggests around one in five people have a limited understanding of how their credit cards work – and that can make a big difference to the total cost you'll pay.

See also: Clearing credit cards takes longer than you think

See also: The best credit cards to take on winter sun holidays

A third of people (30%) don't really understand how purchase credit cards work, while APR, balance transfer fees and cashback confuse around one fifth (between 20% and 22%). One in ten also have a limited understanding of minimum monthly payments and interest free periods, according to MoneySuperMarket.

Each of these can add to, or even reduce, how much you pay each month – if you know how they work. So to help, here are some of the main credit card terms you need to know.

APR

The annual percentage rate (APR) is how much you're being charged to spend money on the card. So a credit card with an APR of 18% means you'll be charged 18% over 12 months.

Representative APR

When you're accepted for a card, check the rate you get. It might be different to what was advertised. That's because the 'representative' APR is only what the majority get – and that could mean 49% of people get something far higher.

Minimum monthly repayments

If you can't pay off the full balance every month, you need to make a monthly minimum repayment to avoid extra charges. But selecting a percentage of the debt rather than a set amount will end up costing you more. Aim to pay back as much as you can afford, ideally via a Direct Debit.

Balance transfer credit card

There are a number of balance transfer credit cards which allow you to move your debt from one or more cards to it.

This can be a good idea if you want to consolidate different cards at a lower rate of interest – even 0%. However, most will charge a balance transfer fee – normally a proportion of the amount moved.

You also still need to make the minimum repayments each month.

Purchase credit card

A 0% purchase card allows you to spend without accumulating interest. They can be a good way to spread the cost of a large purchase if you have a plan to pay the balance off. Again, you need to pay the minimum each month.

Interest free period

If you've got a 0% balance transfer card or purchase card, this special interest-free rate won't last forever. Though some can last for years, once the period ends you'll start paying interest again – often at quite a high APR.

Cashback credit card

Some cards will earn you money back each time you spend. Though the amount is generally low, they can be a way to earn extra cash as you spend. However, they are pointless if you then don't pay off the balance in full each month, as the interest charged will be more than anything earned.

A reward credit card does the same, but you earn loyalty points instead.

This article is provided by the Money Advice Service.



SPONSORED FINANCIAL CONTENT