Figures released from the Credit Action, the UK money education charity showed credit card purchase transactions made every day in October 2012 amounted to a shocking total value of £1.424bn.

If like many of us you are struggling to understand credit card jargon or how to make the best of your plastic, then look no further as I’ll cut through the confusion to show you how your credit card works.

Interest rates

APR (Annual Percentage Rate) tells you the average annual cost of your borrowing over the term of the debt.

APR is calculated by using an assumed borrowing of £1,200, so it makes for easier and fair comparisons of credit cards. As such, lenders are legally required to inform consumers of the APR of any given product.

Are you still with me? If that hasn’t already thrown you off, there are two types of APR: personal and representative (formerly, typical).

Personal APR is fairly simple as this is the same interest for everyone. However, it’s representative APR that is used to advertise credit cards and this can vary depending on your credit score. Representative APR is the minimum that the majority of customers will pay, so in reality 49% of customers may end up paying a lot more.

TIP: Always check your personal APR once you have been accepted for a credit card.

Minimum repayment

Unlike most people, when I receive my monthly credit card bill, I look at everything aside from the minimum repayment due. Do you know why? By paying just the absolute minimum, it could take me years and cost me thousands of pounds to pay off a relatively small debt.

As the name suggests, a minimum repayment is the very minimum you are required to pay, but you are able to pay more should you wish.

TIP: Ignore the minimum repayment and repay what you can afford.

Balance transfer fees

If you’re looking to shift the balance of one credit card to another to benefit from low interest rates, you’ll probably have to pay a balance transfer fee. This one-off fee is usually hidden behind the eye-catching 0% interest headlines.

The balance transfer fee is a percentage of your balance, usually somewhere between one and four per cent, but is often capped to a maximum to avoid ridiculous charges.

TIP: Don’t forget to consider the fee as well as the interest rate when comparing balance transfer credit cards.

Reward credit cards

What’s better than an afternoon splashing the cash on your plastic? How about receiving cashback or other rewards for doing nothing more than hitting the shops? Some credit card companies reward their customers for using their card, but watch out because there are some downsides.

Reward credit cards often have a higher interest rate than standard cards and in some cases the rewards can be much less valuable than at first glance. Compare rewards credit cards to find the best deals.

TIP: Repay the balance immediately to maximise the benefits of rewards credit cards.

Consumer protection

Have you heard of Section 75? This handy piece of legislation has helped me out of many a sticky situation in the past, so it’s high time you were aware of it.

Under Section 75 of the Consumer Credit Act 1974, both the supplier and the lender are responsible for protecting the customer if anything goes wrong. In plain English?

I bought a brand new, swanky television from a well-known electrical retailer around six months ago. Everything was going swimmingly until one day it wouldn’t turn on for love nor money. I planned to return it, but after going into administration the retailer is no longer accepting returns.

If I’d paid for my TV with cash or debit card, I’d have to bite my lip and accept the damage, but as I’d charged the £1000 to my credit card, I was able to get all of my money back. This consumer protection applies to any goods or services paid for with a credit card and costing between £100 and £30,000.

TIP: Always pay with a credit card for items over £100 and repay immediately to benefit from free protection.

Foreign usage fees

It may surprise you, but a credit card is actually one of the cheapest ways to spend abroad – provided it’s the right one.

The majority of UK credit cards charge a foreign usage fees when used abroad, including a currency exchange rate (loading) fee of around 3% and cash withdrawal fees, which are usually £3, sending the cost of your purchases sky high.

TIP: Avoid this charge by opting for a credit card specifically for overseas spending, compare credit cards here.

	Written by :
	Jemma is a news & research reporter for compareandsave.com.Having worked as a journalist on a number of personal finance websites; she now spends time researching and commenting on UK personal finance stories and investigating new ways to help our readers save money.For press enquiries, please visit our Media Centre page.

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Choosing the right credit card can be tough. With hundreds of credit cards available through dozens of providers it can be tricky to find the perfect card.

So, to help you, we have put together this straightforward guide to the five things you should take into account when you compare credit cards.

1. Interest rate

When you are looking to apply for a credit card, the interest rate will be one of your most important criteria. You may be looking for a 0% balance transfer or purchase rate, or you may be looking for the most competitive long term deal. Or, you may want to use the card abroad and want the most competitive rate.

Make sure that you know exactly what type of deal you’re looking for before you compare credit cards. If not, you could end up with a deal that isn’t appropriate for your particular circumstances.

2. Fees

While the interest rate on credit cards might be the most important consideration, make sure that you also take any fees into account. For example, if you’re looking for a balance transfer offer then you may have to pay a fee of up to 3% of the balance you transfer. Always ensure you know what fees apply.

Make sure you also take into account the level-off fees for late payments, duplicate statements etc.

Sometimes paying a higher interest rate and a lower fee may benefit you. Do your homework and take both the interest rate and any associated fees into account when you do your credit card comparison.

3. Service

While great rates and low fees may be attractive, you will soon become disenchanted with your credit card provider if the service you’re getting isn’t up to scratch. Nothing is more frustrating than hanging on for hours on an automated telephone system or standing in a long queue at your local branch.

When you compare cards, have a look at the level of service offered by the card provider. For example, do they have a 24 hour online banking system that will allow you to check your account balance and make payments to your credit cards?

4. Application criteria

When you compare credit cards it is, of course, vital that you look at credit cards which you are eligible for. There’s no point finding a credit card with great rates and low fees if you aren’t eligible.

So, when you compare credit cards, make sure you check the eligibility criteria. For example, many cards won’t be available to you if you have any sort of adverse credit. Other cards have different criteria, such as a minimum level of income.

You’ll end up wasting your time if you don’t make sure you’re eligible for a particular credit card before you apply. Plus, if the application is unsuccessful, it’ll leave a ‘footprint’ on your credit report, which may make it harder to get accepted for the next credit card you apply for.

5. Other credit card benefits

In order to differentiate theirs from other credit cards, many banks and building societies now offer a range of additional benefits and perks to cardholders. These include insurance products, enhanced security on your credit cards, reward points and discounts for goods and services. Some cards also offer vouchers or cash back based on usage.

While additional perks might be beneficial, when you apply for a credit card you should not be swayed by short term incentives or one-off offers. Finding a card that offers a good interest rate and low fees can save you hundreds, or even thousands, of pounds in the long term and the savings on a good value card will often well outweigh the value of small incentives.

However, when you compare credit cards it is worth taking any additional benefits into account as this could sway your decision.

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There’s no question that APRs for all personal loans are higher than they were a few years ago. Average interest rates on loans of £3,000 are now around 14.6% whereas they were less than 6.5% in 2006, before the global credit crisis began.

Loan deals abound for those with good credit, bad credit, or in between. When you compare loans it may help you if you create a list of top 10 loans for which you believe you can qualify.

The question of whether or not instant loans always have high annual percentage rates (APRs) partly depends on whether you’re talking about loans which are received virtually instantly such as payday loans, or instant-decision loans, where the decision as to whether you qualify for a loan is made instantly (within 5 minutes).

With instant decision loans, the lender uses your information to make an instant credit check, usually online, though some still prefer to work by phone.

Instant decision personal loans are not the same as payday loans because your credit is evaluated before a decision is made. While you can usually get your money quickly, expedited services often incur extra fees, sometimes up to £30 or so.

With instant loans such as payday loans, the decision is made instantly based on factors other than your credit history. Generally you’re required to be over 18, to have a valid bank account, and to have a steady, verifiable source of income. When these loans are made online, sometimes the funds can be deposited the same day.

With instant payday loans, you do pay fees that would work out to an extremely high APR. However, if you pay off the loan on time, this is immaterial, because terms of these loans are usually only a couple of weeks at most. The big danger with this type of loan is not being able to pay it back on time and having to extend the term of the loan. In these cases, fees mount quickly, sending the equivalent APRs sky high.

So whether you’re applying for an instant decision loan or an instant payday loan, you should compare loans because terms from one lender may be more favourable than from another. With instant decision loans, check for delivery charges if you need the money quickly.

Always avoid taking advantage of lenders’ offers of “payment holidays” where they allow you to defer repayments for the first few months of your loan. Interest rates continue to add up during this time, making future repayments higher, and adding to the total amount you’ll pay back.

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New regulations adopted by the European Union in 2008 come into effect in the UK from 1 February 2011.  One of the most important changes contained in the new directive is the requirement for financial services providers to include a ‘representative example’ when advertising financial products.

‘Representative Example’ defined

The Department for Business, Skills and Innovation (BSI) guidelines say: “If an advertisement includes an interest rate or any amount relating to the cost of credit, it must also include a representative example. This must contain certain standard information including a representative APR.”

It will apply to the vast majority of advertisements for any product covered under the Consumer Credit Act for credit under £60,260 (loans, credit cards, etc).

What information will be included in a ‘representative example’?

The standard information which will be included in a ‘representative example’ will include:

•    The interest rate – a fixed or variable percentage, applied on an annual basis
•    Any Total Cost of Credit (TCC) charges – details of any fees or charges included
•    Total amount of credit
•    Representative APR

What’s the idea behind a ‘representative example’?

The aim of a ‘representative example’ is, according to the BIS: “to ensure that important information concerning the cost of the credit can be viewed together as a whole, so that the borrower can assess suitability and affordability in the round.”

It is designed to make it easy for consumers to compare the true cost of financial services products from provider to provider and from product to product.  The requirement for the ‘representative example’ to be more prominent than other information on the advertisement also now makes it the most important item on a financial services advert – the APR figure will no longer take prominent position.

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From 1 February 2011, financial services providers in the UK will be subject to a new set of guidelines.  The grandly named Consumer Credit (EU Directive) Regulations 2010 makes various changes to the way financial services companies advertise their products.  One of the most important parts of the new legislation requires companies to include a ‘Representative Annual Percentage Rate (APR)’ on their adverts.

What products do the new rules apply to?

The new Directive applies to advertisements and credit agreements for all loans to consumers under £60,260 excluding  agreements secured on land, certified business loans and investments regulated by the FSA.

It will include items such as personal loans, smaller secured loans and credit cards.

What is a ‘Representative APR’?

Companies can often charge consumers different APRs for the same product.  For example, if credit card or personal loan rates are determined by your credit rating or your income, you may not pay the same rate as someone with a lower income or superior credit history.

APR figures in the UK have also often been misleading as they don’t always take into account certain fees, such as annual charges or credit card ‘balance transfer’ fees.

The Department for Business, Skills and Innovation (BSI) defines the ‘Representative APR’ as: “an APR at or below which the advertiser reasonably expects, at the date on which the advertisement is published, that credit would be provided under at least 51% of the agreements which will be entered into as a result of the advertisement”

In simple terms, where the APR for a loan or credit card can vary depending on an individual’s personal circumstances, the APR that is stated on an advertisement must represent at least 51% of the business that the financial services provider expects to come from that advert.  A representative APR will also take into account other charges associated with the product, for example, balance transfer fees, and will be based on an EU average credit limit of £1,200 (unless known to be lower).

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