When one card isn't enough

Published by Laura Hinton on 11 December 2007.
Last updated on 18 October 2010

Couple pose with credit card

You would be forgiven for thinking a wallet full of cards is the mark of a spendthrift. However, when it comes to credit cards there is unfortunately, no one size that fits all. While there are plenty of fantastic deals out there that can help you save serious money, use them in the wrong way and they could end up costing you.

The savviest borrowers will have different cards to meet different borrowing needs, so to make sure you don't pay a penny more than you have to, it pays to get a better understanding of your spending habits and learn how to pin down the right cards for you.

If...you have an outstanding balance

If your credit card statement shows an outstanding balance that you cannot afford to pay off in one go, the interest rate you pay needs to be your priority. The chances are that you are paying way more than you have to (up to 18% is not unusual), but the good news is this can be an easy cost to cut.

By switching your debt to a card that offers 0% on balance transfers it's possible to focus on repaying your balance without it growing any bigger. Look for cards which offer the longest interest-free period - some offer just a few months, others a year.

While these cards do offer some fantastic savings, there are some catches to repaying debts interest-free, so you need to take care and be aware of the small print. First, you need to make a note in your diary of when interest-free period expires. Once this happens, the rate of interest charged on your balance will shoot up - undoing all your savings, so you need to make sure you pay off your debt within this time.

If this isn't possible, you'll need to arrange another 0% balance transfer card in good time.

You also need to be wary of using your card to make new purchases, which will often be charged with a higher rate of interest. Most cards operate what is known as a negative payment hierarchy, meaning that your monthly repayments will go towards the cheapest debts first, your interest-free balance transfer, while your more expensive debts, your new purchases, will be left to grow as the higher interest charges rack up.

Nationwide and Virgin are rare in offering a positive payment hierarchy on their credit cards. This means they apply your repayments to the most expensive debts first. Other banks may soon be forced to follow suite, as the Office of Fair Trading is looking into banning negative payment hierarchy. But until then, unless your card offers 0% on new purchases as well, or has a positive payment hierarchy, it pays to use another credit card if you are planning to spend.

Finally, you need to be aware that you are likely to be charged a fee for transferring your balance, up to 3% of your balance, so you need to work out whether the savings will outweigh this fee.

If...you are a big spender

Credit cards come in very handy when you have large purchases to make, or if you have an expensive month or two in the pipeline. But again, if you know you are going to take a while to clear the bill, the rate of interest you pay should be your paramount concern. There are plenty of cards offering 0% on new purchases for a year, sometimes more. These allow you to spread the cost of your purchase without the worry that the debt will grow.

But, as with 0% balance transfers, there are catches. Once again you need to make a note in your diary when the rate expires. If you need to, your existing debt could be transferred to a 0% balance transfer card, although you have to be careful because continually switching cards can damage your credit rating. The trick is to pay it off before the offer expires, so take the debt and work out how much you need to repay each month to clear it in time.

If you only stick to the minimum repayment demanded by your credit card issuer, it could take you years to repay the debt and you'll pay a fortune in interest. If you are unable to get a 0% deal because your credit history prevents you from doing so, the best cards to choose are those that offer a long-term low standard rate. The best deals start at 6.8% - much better than the standard APR.

If...you clear your bill every month

Just because you're one of the bank's most sensible customers and always pay your bills in full every month that doesn't mean you can put your feet up. Even though you won't be incurring any interest charges, you could be missing out on free cash.

If you never carry a balance, your best bet will be a card that rewards you for doing so. Cashback cards pay a percentage back (typically 0.5%) for every purchase you make, although some such as American Express and Capital One pay enhanced rates during the first three months. Some cards offer cashback while others offer rewards like airmiles or supermarket loyalty points, so if you opt for one of these you need to make sure you pick one that suits your lifestyle and shopping habits.

You also need to be aware that they can encourage you to spend more on your card. While some cards offer short term interest-free offers, these cards are usually only worthwhile if you pay off your balance in time and in full every month, otherwise the interest in charges will erode the benefits of your cash back or loyalty points.

If...you are travelling overseas

Credit cards carry a number of hidden charges that most holidaymakers forget about when they are away, but reality hits home when the bill arrives. Almost all cards add an extra 'load' on top of the exchange rate, usually about 2.75%. There is also a fee of around 2.5% for withdrawing cash from an ATM abroad.

As a result, it pays to only use your credit card for purchases - if you need to take money out of the hole in the wall, use your debit card instead.

If...you don't want to keep switching

If the thought of continually switching cards leaves you cold, then you need to find a card that offers good value over the long-term. Although standard APRs can exceed 15%, if you shop around it is possible to find cards that offer long-term low flat rates.

The best cards have rates as low as 6% and you shouldn't have to pay more than 10%, while you typically have up to 59 days after making the purchase before interest starts being charged. However, just because rates are low and there's no expiry date, that doesn't mean they're fixed, so it's still worth keeping tabs on the rate you pay.


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