Five clever credit cards
Using a credit card can be the best way to pay off outstanding debt or fund new purchases - as long as you pick the right plastic and use it wisely.
For example, opting for a card that offers 0% interest on balance transfers and/or purchases gives you breathing space to make your payments without seeing your debt increase. For example, Egg offers a VISA credit card that charges no interest on balances until 1 July 2010 and is also interest-free on new purchases until 1 August 2009.
However, if you fail to pay off these debt before your interest-free periods end, you could end up paying dearly with even the most competitive 0% cards charging double-figure interest rates. Egg, for instance, will start to charge 16.9% on balance transfers and purchases after its interest-free promotional periods end.
But opting for 0% periods isn’t the only clever way to use credit cards. Here are five plastic offerings that give you something extra – as long as you use them wisely.
1. Interest-free periods
Virgin Money's credit card offers one of the best 0% deals on the market. Customers pay no interest on their balance transfer for 16 months (subject to a 2.98% fee) and nothing on purchases for three. After this time the APR reverts to 16.6%.
The deal also offers 16 months interest-free on money transfers. This means that people unable to get an free overdraft from their bank, or unwilling to pay the often extortionate costs associated with borrowing through your bank, can transfer money into their current account without paying any interest on the loan for 16 months.
Of course, if you fail to repay the money borrowed within the promotion period, then this move looks less attractive. Virgin charges an APR of 20.6% on any outstanding money transfers after 16 months – so your debt could quickly rack up.
But as long as you make sure you repay the money within the 0% period, this is a seriously cheap way to borrow. Just bear in mind that you will have to pay a fee - 4% of the money transferred - which is added to your overall debt.
Michelle Slade, spokeswoman for data provider Moneyfacts, says: “Interest-free periods are a great help as long as you make sure you clear all your debt before the promotional periods ends. If you don’t, there is the potential to run up extra debt.”
2. Foreign transaction fees
Abbey's Zero credit card not only offers 0% periods on balance transfers (12 months) and new purchases (three months), but it also waives fees on cash advances and foreign transactions outside of Europe.
Other than the Post Office, Abbey is the only credit card provider not to charge a fee when you use it outside of Europe. Other providers generally charge between 2.75% and 3% on foreign transactions – so this card could potentially save you £60 when you spend £2,000.
The fact that you won’t be charged a fee for withdrawing cash is also a bonus – other providers charge as much as £5 per withdrawal. However, bear in mind that you will face paying a whopping 27.9% interest on cash withdrawals, so this card should not be used to make an advance unless it is an absolute emergency.
Kevin Mountford, head of credit cards at moneysupermarket.com, says: “Customers should take full advantage by using their credit cards shrewdly. Ultimately, the Abbey Zero card is for spending abroad; if you want a card for balance transfers or purchases there are better deals out there - like Virgin’s 15-month 0% balance transfer deal."
3. Positive payment hierarchy
Interest-free promotions on balance transfers and new purchases are a great way to stagger your debt repayments. However, one major catch is that if you fail to pay off these balances within the pre-agreed time period, then you will have to start paying interest.
In addition, the vast majority of credit card providers use negative payment hierarchy - this means your payments will be used to pay off the balances attracting the lowest interest rate first.
Therefore, if your 0% purchase deal has expired but you still aren’t attracting any interest on your balance transfer, then your subsequent payments will be used to pay off the transferred balance rather than new spending.
The crux of this is that you will end up paying more in interest as your purchase debt (possibly attracting interest of around 18% APR) will not reduce until the balance transfer is paid off.
One exception to this rule is the Nationwide Gold credit card. This deal offers 0% on balance transfer for 13 months (subject to a 3% fee of at least £5) and 0% on purchases for three months.
Once your interest-free period on purchases has ended, Nationwide will use your payments to pay off the debt being charged at the highest interest rate, before that charged at a lower interest rate. So, payments are first allocated to any cash advances (27.9% interest), then purchases (16.9%).
4. Long-term low rates
Another catch with most cards that offer interest-free periods is that if you miss a payment or are late paying your balance, your provider could cancel your promotional offer and start charging you interest. If you've moved a large balance over, or made an expensive purchase, this can be a real financial shock.
To avoid this happening, it’s well worth setting up a monthly direct debit; for example, if you are paying off a balance transfer, divide the total debt plus any transfer fees by the number of months your 0% period lasts for. This should be your monthly payment.
However, if you don’t want the hassle of setting up a direct debit, plan to make new purchases and don’t know how much you need to pay off each month in order to clear your balance, or simply don’t trust yourself to remember to make regular payments, there is another option.
Opting for a credit card that offers a low fixed-rate of interest over the long term is a good way to borrow money fairly cheaply. For example, Capital One's Platinum credit card offers a guaranteed rate of 9.9% until 2012 on purchases and balance transfers – and there is no transfer fee for the latter.
And you can avoid paying any interest at all on purchases as long as you pay off your balance in full and on time within 56 days of making a purchase.
Richard Mason, managing director of Moneyextra.com, says: “Opting for a guaranteed low interest rate is a good trade-off for 0% balance transfer offers if you aren't good at sticking to rigid payment structures.”
5. Get something back
If you are savvy with your credit card and always manage to pay off your balance in full each month, then you won’t pay anything (other than any balance transfer fees) for borrowing.
But if you also want to get something back from using your card then there are plenty of cards out there that pay you rewards, allow you to build up points when you spend, or offer cashback.
Because the type of reward or cashback card you opt for will depend on your personal preferences, here are a selection of some attractive deals on the market.
Peter Harrison, head of credit cards at Moneysupermarket.com, likes Barclaycard’s Goldfish Reward credit card. This deal has an APR of 9.9% on purchases and balance transfers (subject to 2.5% fee of at least £2.50).
You earn one point for every £1 you spend on this card, with an unlimited number of points available, which can be redeemed in over 25 high street stores.
Plus, when you spend £100 a month or more during the first three months after taking out this card, Barclaycard will reward you with 5,250 extra points - worth £30 in vouchers. If you are transferring a balance of more than £1,000, you will also be given an extra 100 points.
Harrison says: “This card offers a good reward scheme because points can be used at many big brand stores.”
These include Boots, HMW, Marks & Spencer, John Lewis, Waterstone’s, Pizza Express and Odeon Cinemas.
Mason, meanwhile, believes the MBNA Platinum Reward credit card is well-worth considering. This deal offers 0% on balance transfers for 13 months (subject to a 2.9% fee), 0% of money transfers for 13 months (subject to a 4% fee), and 0% of new purchases for three months.
After these promotional periods end, any outstanding new purchase debt will be charged at 15.9% APR, while balance transfers will attract annual interest of 17.9% and money transfers will be charged at 19.9%.
In terms of rewards, this card gives you one point for every £1 spent. These points can be redeemed against travel (such as flights and hotels), in high street shops including Selfridges, Boots and Debenhams, and on wine. You can also redeem your points as cashback onto your card.
Mason says: “This deal offers the best of both worlds – you get fairly competitive interest free periods on balance transfers and purchases as well as a rewards for spending.”
Another reward card worth considering is M&S Money’s credit card. This deal offers 0% on purchases for 10 months and 0% on balance transfers (subject to a 2% fee of at least £5). The typical rate is 15.9% APR.
In terms of points, this card gives you one point for every £2 spent – or one point for every £1 spent in M&S. Points are then converted into vouchers, sent out every three months, which can be used against purchases in M&S.
You can boost the number of points you earn with this credit card if you join the M&S Premium Club. Costing £10 a month, members of this scheme earn triple points on M&S spend, free multi-trip family travel insurance, and complementary tea and coffee at the M&S Café worth up to £120 a year.
If it’s cashback you’re after, American Express’ Platinum credit card, with a typical APR of 18.9%, provides 5% cashback for the first three months on spend up to £2,000 per year, and a standard 0.5% cashback on spend up to £3,500 per year.
Any annual spend between £3,501 and £10,000 will earn you 1% cashback, while those who spend over £10,001 earn 1% cashback.
* all rates correct at time of writing (15/05/2009)
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.