Consumer Rights: We think plastic is fantastic, even if we don’t understand it

End-of-term reports were two a penny this week. One from a big discount website showed that many of us have no idea what terms like PPI, ATMs and APR mean, but most striking is that a fifth of us don’t know the difference between a credit card and a debit card.

Another from The UK Cards Association shows that even if we don’t know our credits from our debits we love our plastic. There are 47 million debit-card holders and 30 million credit-card holders with 169 million cards between us. We use cards for nearly three quarters of all spending on the high street and the majority of purchases on the internet. The value of card payments is forecast to nearly double in the next decade to £840bn as debit cards increase in popularity with young people who have grown up with them. Contactless payment cards will encourage us to use them for low-value payments.

Perhaps we do have a tendency to lump all plastic cards together, but it’s worth knowing the difference. If you pay for something using a debit card you’re paying for the goods with your own money. The amount is usually taken off your account balance immediately. If you use a credit card to pay for the same goods you’re using borrowed money. There may be a charge on top and there will be interest to pay on the loan if you don’t repay it in full by a particular date.

Credit cards have the advantage of allowing you to pay now for goods even though you don’t have the money in your account. If you know you will have the money to pay the full amount by the due date, and remember to do it, a credit card can be useful, but if you miss the due date you’ll end up paying more than on the price ticket. There is one important protection a credit card gives you however. If you’re buying something costing more than £100 and less than £30,000, under section 75 of the Consumer Credit Act the credit-card company is considered “jointly and severally liable to the debtor” if something goes wrong.

For example, if you buy a flight from an airline and it goes bust before you travel, it is unlikely to be able to repay you, but you should be able to claim the money back from your credit-card provider. If you buy something that doesn’t arrive the same applies and you’re protected even of you only pay for part of the item, such as the deposit on your credit card. As long as the item itself is worth more than £100, you can claim the whole cost of it back if it’s faulty, does not turn up for some reason, or the company goes bust before delivery. Some cards may offer additional insurance for you purchases, or benefits such as legal or medical services while you are abroad, but these are in addition to this section 75 protection.

Even if you can afford to pay for something without your credit card, it is still worth using it as a safeguard.

The advantage of using a debit card is that you can keep tabs on what comes out of your account and what’s left, just as you would if you took the money out using a cash machine. It’s easier to control your spending and harder to go overdrawn.

Whatever cards you choose check whether there are any perks like cashback, points, discounts or offers that you could benefit from.

Also check the APR on credit cards. Anyone borrowing money through a loan, card, credit agreement, etc, should check out the APR (annual percentage rate). It’s the figure that allows you to compare deals. If you want to borrow £300 and pay it back over 12 months you will pay a lot less interest, administration and other arrangement and management fees, if you sign up for a deal at 10 per cent APR than if it is at 100 per cent APR. Ultimately, you need to know how much you will repay in each instalment, and how many of those instalments you will have to pay, to know whether you can afford a loan, but the APR is a good guide to which deal is the cheapest. The APR on credit cards varies and will tell you which is cheapest if you do end up having to pay charges.

If financial education in schools bears fruit, future generations will know all about APRs and plastic cards. In the meantime, we should all do a bit of revision because you can’t rely on financial organisations to make the explanation simple.

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Q. I’m a self-employed IT consultant and the only earner in our family as we have a young child. I’m thinking about taking out insurance in case I can’t work. Is critical-illness cover the best option? DP, London

A. Critical-illness cover pays out a lump sum if you are diagnosed with one of a number of conditions set out in your policy. The money is to cover treatments you’ll need and adaptations to your home rather than give you an income. Policies tend to cover things like cancer, heart attack, benign brain tumour, coronary artery bypass, heart-valve replacement, multiple sclerosis and stroke. If it’s not on the list of conditions covered by your policy you won’t be covered. However, there is a trend towards severity-based critical-illness cover which pay out more depending on the seriousness of the condition. If you decide to opt for critical-illness cover read the policy carefully so you understand what’s covered and what’s not. It might be better to choose an income-replacement policy. This will give you an income while you’re ill. Some feel private health insurance to cover medical treatment is the best option. The problem with insurance is that you are trying to predict what might go wrong so you have the right cover in place to counteract it. Consequently, it’s a gamble.

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