There is a whole host of credit cards on the market. And, if used wisely, they can be a great way of spreading the cost of big-ticket purchases, earning rewards or boosting your credit score if you’ve had debt problems in the past.
Deciding on which card or cards to apply for, depends what you want to achieve. Here’s more on using credit cards to your advantage.
Managing debt
Balance transfer cards help get debt under control. They offer the chance to switch debt built up on another card – where typically you will pay annual interest (APR) at a rate just shy of 20% – to a new one which offers zero interest for a set period.
Paying no interest at all means that every penny you repay goes towards clearing the debt, rather than going into the provider’s coffers.
Some cards offer an interest-free window of more than two years’ although deals vary. However, the longest interest-free deal might not be the most cost-effective, as these interest-free cards usually charge a fee each time you switch. But not all cards apply the so-called “balance transfer fee” which can be anything up to 3%.
If you had a debt of £4,000 it could cost you as much as £120 to transfer the balance if the card was to charge the full 3%. With a bit of detective work on a comparison site you could find a card with a lower fee, or even zero fees.
Balance transfer cards with lower fees tend to offer shorter periods at 0%. But, so long as you can afford the monthly payments, it would save money to go for a card with a shorter term. You may even end up paying the debt off faster.
If you don’t clear the balance in time, you may be able to transfer the debt again to avoid interest charges.
Making a big purchase
Purchase cards offer an interest-free period for spending on the card. If a big expenditure is looming on the horizon, these cards could be the answer to spreading the cost. At the moment there are purchase cards offering a 0% period in the region of two years – but deals change so always compare your options.
It’s crucial you make sure you are able to repay the full amount before any interest-free period offer is up. After this, the rate reverts to APRs as high as 37.7%, depending on the card you take out.
If you don’t manage to wipe the debt by the end of the fixed period, you can look into taking out a balance transfer card to maintain the 0% interest rate.
Getting something back
Cashback cards pay you to spend. A certain percentage of your monthly balance is paid back to you annually – by crediting the card.
Earning money as you shop is a great way of getting what is effectively a discount on your shopping and making something back on one-off large purchases, too. Always pay back the full balance or the interest charges will negate any cashback gains.
Reward cards
Many cards have tie-ups with reward schemes. You earn a certain number of points with every payment which you can spend elsewhere. M&S, Sainsbury’s, John Lewis/Waitrose, Asda and Tesco Bank credit cards all offer rewards points when you shop with them.
But it’s a good idea to choose one card and stick to it, rather than having a purse or wallet full. Like cashback cards, reward cards should only be used if you can clear the full balance each month as interest charges will far outweigh the value of any rewards you earn.
Credit score repair cards
If you have had trouble with debt in the past, you’re likely to have a blemished credit record. This means that getting credit for anything from a mobile phone to a mortgage could prove difficult.
There are cards available that are designed to help such borrowers. from the likes of specialist lenders Aqua and Vanquis as well as bigger brands such as Tesco and Barclaycard. It figures that these cards offer very small credit limits – in the hundreds, rather than thousands – but are offered to those that are not eligible for mainstream cards.
By spending and making at least the minimum repayment each month, it’s possible to build up a record that shows you can be trusted to repay so lenders are more likely to give you credit in future.
If you do not pay off your balance each month, your score is unlikely to improve – and in this case, you’ll be charged an especially high rate of interest on the debt.
Overseas spending
When you buy goods and services abroad with a standard credit card, there’s usually a foreign usage charge applied which could be as much as 3%. There’s also a withdrawal fee if you take cash out with your card.
If you are a regular traveller, it’s worth considering a credit card that offers a good deal on foreign spending. It can save you hundreds of pounds on a family holiday.
The cards differ slightly in what they offer so it’s important to read the terms and conditions. For example, some may only offer fee-free spending in Europe so if you’re planning a trip for business or pleasure further afield, make sure you factor that into your search.
5 ways to be credit card-smart
- Never withdraw cash from your credit card – doing so attracts hefty fees and interest that will apply immediately
- Set up a direct debit for repayments – the benefits of 0% interest, rewards, cashback and fee-free foreign spending are all wiped out if you fail to make at least the minimum repayments as interest and charges are expensive. Setting up a monthly direct debit is the easiest way to eliminate the risk
- Keep your part of the deal – if you miss a payment completely on a card with a 0% interest period, not only will this affect your credit score, you may lose the promotional offer
- Use an eligibility checker – this assesses the chances of you being accepted for a card before applying which, in turn, protects your credit file. Bear in mind the most competitive cards will only be offered to applicants with an excellent credit record
- Don’t rely on them – if overspending is a problem then it’s best to steer clear of using credit cards at all.
