How to play your cards right

Published by Ruth Jackson on 14 March 2016.
Last updated on 28 April 2017

credit-cards

Almost half of us have a credit card and the amount we spend on them is steadily rising. In just one month – January 2017 – we spent £16.3 billion on our plastic, up 3% on the previous year, according to the latest figures from the UK Cards Association.

But while we are all using credit cards more and more, we may not be using them wisely. Many of us are racking up credit card debt that could take us decades to clear.

The average household owes £2,493 on their credit card. Assuming average interest rates, it would take 25 years and 11 months to clear if you repaid the minimum payment each month, according to The Money Charity.

“When we see these record levels of debt, it’s important to remember that there is nothing necessarily wrong with borrowing. It is a good way of paying for things you can’t afford up front,” says Michelle Highman, chief executive of The Money Charity. “But with interest rates so low at the moment, it’s easy to think high levels of debt are manageable.”

But, with inflation on the rise, interest rates could start to move upwards making your debts more expensive.

The Financial Conduct Authority is alarmed about the number of us who are now in ‘persistent debt’ – defined as paying more in fees and interest on your credit card over the past 18 months than capital repayments – and is now looking into changing the rules on credit cards to help people escape a circle of debt.

This could mean in the future credit card firms can cut people off if they think they are falling into persistent debt. They will then help you come up with a repayment plan to clear your debts.

But, if you play your cards right a credit card can be the cheapest way to borrow money, or a great way to earn cashback or rewards. Here’s how to get the most from your credit cards and avoid the pitfalls.

Never pay interest

A battle for customers between credit card providers means there are a whole host of interest free deals. If you have an existing credit card balance, you can move on to an interest-free balance transfer deal and give yourself ample time to clear the balance without paying interest.

People “should take a look at the rate of interest they are paying on their credit cards, as there are so many great deals out there", says Nerys Lewis, head of credit cards at Confused.com.

“By knowing your spending needs, you can find a suitable credit card, with the right interest rates and, in the long run, save money.”

The longest deal is 43 months on MBNA’s balance transfer card. But it isn’t just about the length of the deal: you also need to look at the balance transfer fee.

This is a percentage of your debt that you’ll pay for moving your balance from one credit card to another. It can be as much as 5%, so watch out. The MBNA deal has a 3.29% fee.

Opt for a shorter balance transfer fee and you can slash that fee. For example, Barclaycard offers 0% for 37 months with a 1.4% or Sainsbury’s Bank offers 0% for 28 months with no balance transfer fee at all.

If you plan to buy something expensive, then consider a 0% purchase credit card. These cards don’t charge any interest on purchases for a set period of time. Halifax offers a card with 0% on purchase for 30 months.

To find the right card for you, take a look at our comparison section, where you can compare different cards. But always repay your card in full before the 0% period ends, or the interest rate will rocket. You also need to make at least the minimum repayment during the 0% period.

Use your card to stop paying interest on personal loans and overdrafts

Normal balance transfers can only be used for credit card debts, but some deals allow ‘money transfers’ where the cash is paid into your current account, so you can pay off a personal loan or overdraft at a lower interest rate.

Again, you need to watch out for the transfer fee, which is usually higher than a standard balance transfer deal. A good option is Virgin Money, which offers a card with 0% on money transfers for 32 months with a 2.5% fee.

Get paid to shop

If you don’t have any credit card debt and you know you can pay off the balance in full each month, then you don’t need to worry about interest rates for purchases. Paying off what you spend within 30 days means you shouldn’t be charged any interest.

This means you should take a look at credit cards that offer rewards such as cashback, airmiles or loyalty scheme points.

Cashback is the simplest reward as it can’t be devalued by the credit card provider and you don’t have to jump through hoops to spend it.

American Express tends to offer the best rewards cards, but be aware that its cards won’t be accepted everywhere.

For example, American Express Platinum Cashback offers 5% cashback for the first three months, then up to 1.25% cashback thereafter. Watch out for the £25 annual fee. If you aren’t a big spender – you have to spend more than £10,000 a year to get the 1.25% cashback – opt for the American Express Everyday card instead. It also offers 5% cashback in the first three months then up to 1% cashback, but it is fee free.

A credit card can help you buy a house

Use a credit card wisely and it can help you in ways you never imagined. For example, having a credit card that you use and pay off each month helps you build up a credit history.

This is invaluable when you want to borrow in the future – for example, if you need a mortgage – as it shows potential lenders that you have been a responsible borrower in the past.

So even if you don’t need a credit card, consider using one for a small amount of spending each month. It could make a difference if you ever need to apply for credit.

Avoid being rejected

Applying for a credit card can be a tricky business with many people being rejected with no clue as to why. Every time you apply for a credit card, it is noted on your credit file. Multiple applications in quick succession look bad to other lenders who worry why you are making so many failed applications.

This can create a vicious circle of you being rejected for being rejected. The reason for this is because credit files don’t say if you’ve been accepted or rejected, but they log every application.

Avoid this by using a comparison website to do a ‘soft search’ first. This means they will check which credit cards you are likely to be accepted for based on a few questions, but it won’t leave a footprint on your credit file. You can then choose a card you are likely to be accepted for.

If the results of the soft search surprise you, take the time to check your credit file via a reference agency such as Experian or Equifax to see if there are mistakes or black marks on your file that are affecting your applications.

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