Weighed down with debt problems? Tip the balance in your favour

Published On 2010-07-06 15:06:00

In these somewhat austere times, debt is a problem facing an increasing number of us as well as the country as a whole. One of the biggest complaints from people who have had debt problems is that they didn’t fully understand what it was they were letting themselves in for when they first signed up with the credit company or agency. For sure, they may well have read the small print or checked the credit card APR and they may well think that their credit score is pretty good, but they never really understood what it meant in real terms.

The aim of this article is to take a lighter approach to the important issue of credit and debt. To understand not just what the key concepts surrounding this issue are, but what they actually mean to you in financial terms. How does the APR rate determine how much interest you pay? What is credit score or credit rating and what does having a good, bad or average credit score actually mean? Lastly, we shall also have a look at how to avoid credit card fraud and in particular online fraud and the cursed phishing email!

A good place to start on our journey into credit is the process upon which credit companies and agencies will judge our suitability to even be offered a credit facility in the first place. That of your credit score or as it is also known; credit rating.

You can find out your credit score by requesting a credit report and this is a good place to start. Firstly, because you can check the information they hold on you is accurate and ensure that any discrepancies are brought to their attention to be corrected. Once you know your credit score, you can begin to understand how credit agencies view you as a potential customer.

Maintaining a good credit score is important, especially if you are likely to need credit in the future. Achieving this is relatively simple and just requires solid management from the individual. Ensure you are on the electoral roll for example, pay your bills on time, don’t try to take out too many credit agreements all at once, close any credit accounts that you no longer use and ensure that you avoid missing and making late payments.

Obviously, if you fail to do much of the above then your credit score will be drastically less and make getting credit much more difficult! Keeping on top of the items mentioned above is a perfect way to maintain and improve credit score.

Having understood what your credit score is, you can now begin to investigate what we need to understand about owning and using a credit card and in particular, what the credit card APR actually means and the best ways to use your credit card, both on the high street and online, to ensure that you are not a victim of credit card fraud.

When you apply and are accepted for a credit card, the company issuing the card will inform you of what the annual APR is for the facility. APR stands for annual percentage rate and broadly means the amount of money that is charged by the company, as a percentage of the debt accrued over the course of the year.

For example, if your card has an APR of 25 per cent and you have a debt of £1,000, this means over the course of the year you will pay £250 in interest alone on the debt and then have to pay extra to bring the debt balance down.

Viewed in such terms, it is obviously vital for a person to fully realise what the APR means in terms of how much money they will be paying each month to the credit company, on top of any money paid each month that is used to reduce the debt.

It is also worth noting that late or missing payments can not only affect your credit rating, but also affect the amount of APR that is charged to the account. It is customary for many companies to charge a much greater APR on accounts that have fallen into arrears and as such, keeping up with payments is vital to keep a tight rein on your personal finances.

Another problem with debt, though not one caused by the actions of the card holder, is credit card fraud. There have been many stories in the press that fraud is rife and that shopping, either on the high street or particularly online, is fraught with danger.

Fortunately, there are many safeguards in place to enable the card holder to ensure all their transactions and details are kept a closely guarded secret. In addition to ensuring that you do not tell anybody your passwords or pin numbers, you can opt into online schemes run by Visa and Mastercard that help prevent fraudulent transactions. Legitimate websites are prefixed by ‘https’ in their web address and will display a padlock to confirm it is a secure site.

Fraudsters however use the phishing email to trick unsuspecting card holders into divulging their information. A phishing email is an email that is written to look as if it has come from a respectable company or an internet service provider and will often demand that the card holder input their private details to confirm who they are. Upon receipt of the information, the fraudster will then use the card details to buy items and run up a large debt on the card.

Fortunately, many safeguards exist to prevent phishing emails working. People are advised to follow the common sense approach and never give their details out online, unless they are 100 per cent sure of a site's legitimacy and no company, if reputable, will ever ask you for your password, pin number or bank details via email.

So by understanding what your credit score is, how to improve it, understanding what the APR will mean to you on your credit card in real financial terms and taking simple steps to avoid credit card fraud, you have already made a good start in beating the growing problem of debt!