Credit Cards Explained

 

If you're carrying forward a balance on one or more credit cards, and being charged interest for the privilege, then consider switching the debts to a lender offering an introductory interest-free balance transfer credit card. By switching to a 0% credit card and paying off as much as you can every month, every penny you hand over during the interest-free period will go towards paying off your debt. Some issuers even allow you to transfer other types of debt, such as overdrafts and loans to a 0% deal.

However, watch out for cards charging balance transfer fees. Many now charge a fee of up to 3% of the amount transferred which can make the transfer of large balances unattractive. There are, however, cards that have yet to introduce a balance transfer fee.

Be wary too of buying anything else on the new credit card during the introductory interest-free period. If the interest-free period only applies to transferred balances, you could find yourself paying interest at the full whack on your new purchases. 

Most card issuers put your new purchase debt at the back of the queue when allocating your monthly repayments thus ensuring they're the last debts to be paid. It means your purchase debt keeps growing at a high interest rate until your balance transfer is paid off, which rather defeats the object of switching!

When your interest-free period is up, switch your remaining debt to a new balance transfer card and repeat until your debt is gone. However, be sure to apply for your new 0% card at least six weeks before the introductory period on the old card expires - it takes time for paperwork to be processed, balances to be transferred and for new cards and PINs to arrive in the post.


0% Purchases

 

If you're looking for help with your cash flow, then a 0% purchases credit card might do the trick.

Many credit cards offer introductory rates that are interest-free for new purchases. The introductory rate is usually for a specified term after which the standard rate applies.

Occasionally credit card companies will offer an interest-free introductory rate that allows you to switch over your current debt from another credit card and to make new purchases - all for free! Sometimes you can even get credit cards that offer 0% interest on both balance transfers and new purchases for twelve months.

Watch out for one catch though, when the 0% period for purchases doesn't look last as long as the 0% period for balance transfers. For example, a card may offer 0% for twelve months for balance transfers but 0% for only three months on purchases. You might think that any payments you make on this card after the first three months have expired will be set against any purchases you made that will now accruing interest at, say, 15% to 20% a year.

However, nearly every credit card provider will offset any payments you make against the lowest interest rate you are charged first - in this case, any balance transfer. The technical term for this sneaky little trick is 'negative payment hierarchy'.

The simplest way to avoid this problem is never to spend on a card that has a shorter 0% period for purchases than it does for balance transfers

 

 

Just looking for a cheap credit card without any of the usual frills? Try a low standard interest rate credit card.

If you're the sort of person who doesn't want to keep chopping and changing credit cards to take advantage of interest-free deals, then a straightforward card charging a consistently low interest rate is probably best for you.

Most 0% deals revert to a comparatively high standard rate once the introductory period is up (between 15% and 20% APR) but there are credit cards that offer a permanently low interest rate of around 8% to 10% APR. This is very useful for anyone who carries a balance forward each month and particularly for those who usually repay in full but occasionally are unable to and don't fancy being charged over the odds.

Although the interest rates on these cards are low compared to other credit cards, they are quite high compared to more long-term debt solutions such as personal loans or lifetime balance transfer cards.

Note also that it's unusual for these cards to offer other incentives such as 0% introductory deals or cashback. 


Cashback:

 

Get paid to spend with a cashback credit card.

If you always pay off your credit cards in full every month, switch to using a cashback card. You could enjoy up to 59 days' interest-free credit and earn a rebate of up to 1% of the value of your purchases, with lenders sometimes offering introductory cashback of 2% or even.3%. If you spend, say, £5,000 a year on a cashback card, you could receive a yearly cheque for up to £50. It might not sound much but it's free money for doing nothing more than you do already so whenever possible, buy everything - even your smallest purchases - on your credit card for maximum cashback.

As always, it's essential to check the small print before you sign up for a cashback card. Some pay more the more you spend, others only pay an introductory rate and others still will cap the amount they'll pay so make sure you pick a card that accords with your spending habits. And only go for one if you always pay off your cards in full every month.

Note that you can use your cashback card alongside store loyalty cards (such as the Boots Advantage, Nectar and Tesco Clubcard) to earn additional rewards.

Finally, many people advocate using cashback cards as an alternative to charity credit cards. Cashback rates are often higher than those on charity cards so you can donate any cashback you get to charity instead. Make your donation via Gift Aid and you can increase its value even further.


Reward Schemes

 

Loyalty or reward schemes, offering things such as AirMiles or points are gaining in popularity. Research suggests that these are one of the main factors - after interest rates - that we consider when deciding which card to have. What's more, you can 'double up' by using a store loyalty card - such as a Tesco Clubcard, Nectar Card or Boots Advantage Card - alongside a loyalty credit card.

These cards can offer good value and many have decent 0% introductory deals as well as reward schemes. However, it can be difficult to assess just how much the schemes are actually worth. And, of course, resist the temptation to spend more than you do, purely to rack up extra reward points!


Lifetime Balance Transfers

If you have a large balance to transfer but expect to pay it off over longer than a year then a lifetime balance transfer credit card could be ideal.

Although millions of credit card users have sensibly been taking advantage of introductory 0% deals, many are getting fed up of having to switch debts to a new card every few months to get the benefits. In fact, research shows that around half don't bother to transfer partly because they think it's too much hassle.

There is, therefore, a growing number of customers who want cards that charge permanently low flat rates of interest so that they don't have to continually switch providers when introductory periods expire. As a result companies are now offering lifetime balance transfer rates which simply means that you'll be charged a simple low flat rate until your debt is paid off completely.

Some of the rates on offer for this type of credit cards are lower than the rates you can get for personal loans and mortgages (although some do charge a 2%-3% balance transfer fee). This makes them a very cost effective way of paying down debt over a period of a few years. Most cards offer a fixed lifetime rate too, protecting you against future rate rises.

However, be careful about spending on the new card after you've found a low flat rate. If you make new purchases, these will most likely attract a much higher rate of interest. Your monthly repayments are also likely to be allocated to the lifetime balance part of the bill so your new purchase borrowing will sit quietly in the background racking up tons of interest until you've paid off the transferred balance.

For people juggling multiple cards, sticking your combined debts on to one long-term low rate card certainly makes it easier to track your finances. But, as ever, beware of the small print.