Looking to boost your knowledge of all things credit cards? This article breaks down some of the key things you need to know about how credit cards work. Read on to better understand everything from payment due dates to what compound interest is.
Your payment due date
One of the most important things to be aware of. Knowing your payment date will help you make sure your payment is on time. Plus, you’ll avoid unnecessary late or missed payment fees.
- Often, the easiest place to find your payment due date is on the app you use to manage your credit card. You’ll usually find a section about your ‘statements’ which will tell you when you need to pay by. You can also see your balance and the amount you need to pay.
- If you use online banking, you can also usually view your payment due date on the account summary page.
- If you don’t use an app or online banking, you should find your payment due date on your monthly statement.
Understanding your statement dates and how you’re charged interest
Every month you’ll get a credit card statement. Either in the post, via your online banking or in your credit card app.
- Your statement is a summary of all the activity on your card. You should usually get it around 3-4 weeks before your minimum payment is due.
- The balance on your statement is the amount you owe on the date the statement was produced.
- The statement will tell you the minimum payment you need to make, and the date you need to pay it by.
- Your statement will show how much interest has been charged up to the statement date.
- You can also see what your estimated interest would be for the next month, if you choose only to pay the minimum payment.
- If you don’t clear your statement balance each month, interest will continue to be charged on any remaining balance.
Setting up a Direct Debit to pay at least the minimum amount each month
Take the hassle out of having to remember when to make your payment every month and consider setting up a Direct Debit. This makes sure your monthly payment is automatically made on time each month. And should also give you peace of mind that you’ll avoid any fees for late or missed payments.
- You can set up a Direct Debit for the minimum payment, a fixed amount or, fixed percentage, or to clear your full balance.
- If you can afford to set your Direct Debit amount for more than the minimum payment, this will help pay off your balance more quickly and you’ll pay less interest overall.
- You can still make additional payments over and above the amount you set your Direct Debit at if you want to.
- You’ll also be protected by the Direct Debit Guarantee.
What happens if you’re late making a payment or miss it altogether?
It’s important to know your payment date and to make payments on time, or even better, have a Direct Debit in place. But sometimes life can be unpredictable, so if you are late making a payment:
- Try and make that payment as soon as you realise
- If you’re experiencing financial difficulties and can’t afford the payment, the best thing you can do is to get in touch with your credit card provider. They’ll talk through your situation and find a way to help you.
- If you don’t make a payment and don’t get in touch with your provider, they’re likely to reach out to you by phone, text or email to discuss next steps.
- Late or missed payments may also be reported to the credit reference agencies and this can make it more difficult for you to get credit in future, so try and avoid this if you can.
- Credit card providers will also typically charge a fee to customers for late or missed payments. That’s why it’s important to be aware of your payment date and to make at least the minimum payment each month.
What is compound interest?
You won’t see this phrase on your statement, but it’s important to understand it. This is the type of interest most providers typically use for credit cards.
Interest is charged daily on any balance you have over £0 (as long as you’re not on a promotional 0% interest rate). So, if you don’t clear any outstanding balance by your payment due date, you’ll be charged interest. That interest amount is added to your balance for the next month.
When your interest is calculated again for the next month, it’ll be worked out using your full balance. Part of that balance will be the interest from the previous month. So, you’ll be charged interest on the interest that was added to your balance, as well as on the balance itself. This is compound interest.
If you can afford to pay your balance in full each month, you’ll avoid paying ‘interest on interest’ in this way.
Check out our helpful video of maths expert Bobby Seagull explaining all about compound interest. We’ve teamed up with Bobby to create handy, bite-sized video guides covering a range of topics from APRs and IVAs to persistent debt and credit scores.