Credit and store cards
Credit cards, charge cards and store cards all work very differently.
This guide will explain the main differences between them.
How do credit cards work?
A credit card allows you to spend money on credit up to your credit limit.
To avoid paying interest on what you spend, it is good practice to settle your credit card bill every month. Otherwise, you could face high interest rates, which are backdated.
If you make a purchase at the beginning of the month and do not pay it off in full, you will be charged for the whole month’s interest.
What are the charges and fees for using a credit card?
If you do not pay off your credit card balance at the end of the month, you will pay interest on the amount you owe.
If you are a new customer, you should be aware that newcomers are typically offered a low interest rate, which can increase substantially when the introductory period comes to an end.
If you make your payment after the monthly deadline on your statement, you will incur a late payment fee.
In addition to this, your credit report will show other companies that you were late making your payment, which damages your credit rating and could make it more difficult for you to obtain another credit card or another credit facility, such as a loan or mortgage.
When it comes to withdrawing cash, credit and debit cards function very differently.
In general, debit cards tend to be free or they advise you at the point of withdrawing cash if you will incur a charge for the withdrawal.
However, when you withdraw cash using a credit card, you will normally pay a fee each time you make a withdrawal and the cash machine may not issue you with a warning about the additional cost.
Credit card cash withdrawal fees vary widely and can be as much as £5 per withdrawal. You will also be charged interest on the withdrawal, even if you settle the balance before the repayment date.
Credit card cheque fees
Credit card cheques are virtually obsolete, but can be issued by your credit card company on request.
A credit card cheque works in much the same way as a regular cheque, but the cheque funds are added to your credit card bill rather than withdrawn from your bank account.
What is a store card and how does it work?
A store card is essentially a credit card (with the associated charges and interest), which you can only use within one retail chain.
Store cards tend to offer an introductory discount, money-off vouchers, cardholder reductions and other benefits, such as free delivery for online purchases.
Store cards are not to be confused with store-branded credit cards, such as Tesco, Sainsbury’s and John Lewis, whose credit cards can be used anywhere.
They are also different from reward cards or loyalty cards, such as Sainsbury’s Nectar card or Tesco’s Clubcard, which enable you to collect points on your shopping and redeem them later by getting money off your shopping bill.
What are the charges and fees associated with a store card?
Store cards sometimes apply twice the interest rate of an average credit card.
The only way to avoid these interest rates is by consistently paying off your bill in full.
What is a charge card?
A charge card is a form of credit card, but you must pay off the balance every month.
If you do not pay your bill, your account will attract interest, a fee and your card may be cancelled.
Unlike most credit cards, charge cards are not accepted universally.
What are the charges and fees for using a charge card?
Annual account fees are dependent on the charge card in question.
High fees tend to be offset by other benefits, such as access to airport lounges or free travel insurance.
Late payment fees are normally a lump sum of approximately £15, which you will pay every month that you miss the payment deadline.
Additionally, you will pay interest on the balance at a penalty rate, which could be significantly higher than the average credit card rate.