Choosing a credit card can be a difficult task. Since their introduction in
this country, with Barclaycard in 1966,
the credit card market has exploded. As the market
has expanded, so has the huge variety of cards on offer.
Whether you are a credit card virgin or a seasoned plastic addict, navigating
the maze of interest rates, points and promotions to find the right one for
you can be daunting.
The following tips will help you to understand the options available,
explaining the key terminology and describing the benefits of the different
promotions and add-ons to find the best card deals.
APR
Like almost any loan, there is an interest rate attached to your credit card
borrowing. Unlike a personal loan, however, card providers give you the
opportunity to avoid paying any interest, provided that you clear the
balance within a given time limit, usually about a month.
If you do not clear the balance, it will begin to accrue interest. This is
described in promotional material as the APR
(annual percentage rate).
It is particularly important to opt for a card with a low APR if you think
that you will be unable to clear your balance each month. APRs are usually
between 15 per cent and 20 per cent, but they can be as high as 30 per cent
or more, particularly if you have a poor credit rating.
0 per cent deals
It is now common for credit card companies to try to attract new customers
with 0 per cent deals, either for transferred balances or new purchases, or
both. If you take up one of these deals, you will not pay interest either on
a balance moved to your new card from an old one, or on purchases made with
the new card. The 0 per cent period usually lasts between a couple of months
and a year.
If you have a large outstanding balance on a credit card, it may be worth
applying for a card that is promoting 0
per cent interest on balance transfers. This will give you some
breathing space from interest charges and help you to clear the balance, which
should always be your priority.
But watch out for the balance
transfer fee, which is usually a percentage of the total amount you
transfer to the new card. These fees have been creeping up recently and now
average 2.7 per cent.
Alternatively, if you plan to spend a large amount over a short period of
time, perhaps to buy an expensive item such as a television, you could opt
for a card offering 0
per cent interest on purchases. Your credit card effectively becomes a
free loan, so long as you clear the balance before the interest-free period
runs out.
Cash advance fees and interest rates
Drawing money from an ATM with your credit card should be considered only in
emergencies. The overall cost is likely to be extortionate. If you think
that emergencies include a broken chip-and-PIN machine at your favourite
bar, then ask about the fees and interest rates for a “cash
advance” when choosing a new credit card.
You should also find out about the hierarchy
of repayments. Most card providers use your repayments to clear the
cheapest debt first and the most expensive debt last, meaning that those
pricey cash withdrawals can sit on your balance for months. However, at the
time of writing, Nationwide
and Saga work in reverse. Your repayments go towards paying off the most
expensive items first, saving you money in interest payments.
Premium and charity cards
Some cards are available only to people who earn a certain amount of money.
These premium or status cards, which often come in gold,
silver, platinum or black to denote their exclusivity, are more likely
to require the cardholder to pay an annual fee in exchange for a lower
interest rate and benefits such as travel insurance.
Look at the benefits and decide whether they are actually useful to you. If
they are, these cards may offer value for money, but it is not worth paying
an annual fee for a card that does not save you money in other areas, as
there are plenty of cards that do not.
Charity
cards function in the same way as a normal credit card, with the added
bonus that a
small percentage of your spend will go to a chosen charity, typically
about 0.25 per cent. There are cards that donate a higher percentage to
charity, but it may well be better to opt
for a cashback card and donate the money yourself.
Charges
Credit card companies were ordered to shrink their charges
in 2006 after the Office
of Fair Trading branded them “excessive” and “unfair”.
There are two reasons why you could end up being charged by the card
company: if you fail to make the minimum monthly repayment or you exceed
your credit limit.
These charges average about £12, according to Moneyfacts.co.uk, the financial
website. If you can, ask the credit card provider how much its charges are.
If they are considerably higher than this, choose another card.
Cashback and loyalty cards
There is a huge range of inducements available to encourage you to spend money
on a credit card. Companies are even willing to pay you to do so.
Cashback
cards pay you a percentage of your monthly spend on the card. The best
deals can refund up to 5 per cent of the cost of your shopping, but most are
between 0.5 per cent and 1 per cent. Cashback cards should appeal to
shopaholics and those consumers who use their plastic for everything.
Alternatively, you could opt for a loyalty
card. These work in a similar way to cashback cards. If you shop
regularly in a certain supermarket, would like to earn
free flights or want discounted CD’s and DVD’s, you can pick up a
corresponding credit card that can help. There are dozens of loyalty cards
on the market, promising rewards or reward points, either from individual
companies or as part of larger schemes, such as Nectar.
However, you should consider one of these cards only if you plan to clear your
balance at the end of the month. There is no point paying interest at 16.9
per cent on purchases that you have put on your card only to earn a few
extra Nectar points or 0.5 per cent cashback.
Minimum payment
All credit card users have to pay back a small amount of their balance each
month in the form of a minimum
payment. This can vary in size from 2 per cent to 5 per cent.
Making only the minimum monthly payment on almost any card will result in a
hugely drawn out repayment period and a hefty interest bill. But if you
think that you will not be clearing your full balance each month it
is better to choose a card with a higher minimum payment. This will mean
that the balance will clear more quickly. The information at the bottom of
this summary
box for a Barclaycard Platinum card gives a typical example of why
sticking to the minimum payment each month is a bad idea.
Purchase protection
One advantage of using a credit card to pay for your shopping is that you are
protected under section
75 of the Consumer Credit Act 1975. If your goods are faulty and the
supplier has gone out of business, you can claim the cost of a replacement
from your credit card provider. This applies to all credit card companies in
the UK.
Some offer extra levels of protection, including “purchase delivery
protection” and “online purchasing protection”. This may sound attractive,
particularly to online shoppers, but it is worth finding out whether the
protection is any better than that guaranteed under Section 75.
Security
Credit card companies are beginning to take fraud extremely seriously. If
identity fraud is something that concerns you, there are credit
card companies that offer identity theft protection and free credit
checks.
Five news stories
Banks
and stores under attack for reckless credit card lending
Banks
accused of tricking customers over credit card charges
EU
orders Mastercard to slash credit card fees
Fresh
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Credit
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Five features
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New
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Credit
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the sneaky credit card traps
Five websites
Choosing and Using
Money
Made Clear
Moneyfacts
Credit
Choices
Credit Card
Five videos
Save on your credit cards
Battling back against
credit card charges
Balance transfer credit
cards - tips and information
Lesson 114 - Cash-Back
Credit Cards
good bye credit cards...
