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10 Things You Should Know About Credit Cards
Many switched-on customers have enjoyed a bonanza of free credit by switching cards and moving potentially expensive debt to interest free offers.But as banks become wise to the “rate tarts” as their known, Datamonitor revealed that as a nation we owe a scary £1 trillion in personal debt. So, although credit cards are useful, they have become a dangerous trap for many people. Follow our tips for getting the best from your credit card.
1. What is the length of the balance transfer?
There are various offers available when opening a new credit card and you should keep in mind your needs and capabilities – as well as the size of your current debt.
If you’ll be able to pay the balance off during the interest-free period, then a zero interest offer would be great for you. But be realistic. If you are transferring a large amount of debt then going for a life of balance deal with a low fixed monthly rate will probably work out cheaper in the long run.
Most cards are now charging fees for balance transfers. These range from around £50 to a percentage of the balance. However, this attack on the rate tarts that continually move their balance to avoid paying off their debt, has also led to longer interest free periods, so even if you have to pay £50 to transfer your balance, you will make it back in saved interest.
If you have a large debt though, you should be careful with percentage fees. A balance transfer of £7,000 at three per cent will cost you £210.
Again, a lot depends on the size of your balance and the length of time that it will take you to pay it off so think carefully before choosing your card.
3. Should you be taking out a personal loan?
While many consumers with good credit ratings have moved their money around between interest-free cards for years, there are a number of factors that should be considered. Owning many credit cards and only paying the minimum amount each month is regarded badly by many credit reference agencies, and as highlighted above, you now have to pay to do this. (For more information read our guide to Fixing your credit rating
Also, zero per cent transfers should not be relied upon. If you’re one of the many people who move their balance every six months to avoid paying it off, you will be leaving a trail of credit cards behind you and could find that new cards will no longer take you. So it might be time to finally pay that debt off.
A loan offers a long-term structured method of paying off a debt that might have been lurking around for years – and rates are much cheaper than credit cards.
Use our Loans Calculator to check out the latest unsecured loans.
4. Don’t use a balance transfer card for new purchases
It might be worth taking out a second card for new purchases as these won’t be included in your zero per cent transfer rate. Using a fixed low-rate card for purchases can save you lots of money, as your balance transfer card will take payments to pay off the debt, meaning that you won’t be making any contribution to new purchases.
Do be careful though – this advice is based on sensible usage – not increasing personal debt. Credit cards are a very expensive form of borrowing and you need to have a sound payment plan to stay on top of it.
If you find endless switching and rate seeking tedious, then perhaps you should simply go for the lowest typical APR. Compare lowest standard APRs
6. They are useless for cash
Even if you pay your balance off each month to avoid paying interest on your purchases you can still end up being charged for certain things. These exclusions even apply to cards that offer interest-free rates on purchases. For example, withdrawing cash is never free, and the interest starts to clock up from the moment you take the money from the ATM.
To add to this, banks are now beginning to widen the category of “instant cash transactions” – where money immediately leaves your account – to cover things like online gambling.
Make sure that you’re aware of all the exclusions applied by your card so that you don’t get caught out with unexpected charges.
7. Pre-pay credit cards
This is a new kind of card aimed at young people and those not in a position to take credit. The pre-pay cards, which can be topped up in a shop, over the phone or online, use the Visa and Mastercard systems to offer a new way of staying on top of your spending.
While these cards mean that you can’t overspend, they do cost a lot. There are fees for opening the card, a monthly maintenance fee, transaction and loading fees and charges for using ATMs and for using your card abroad. These charges can take out as much as £5 for every £100 that you spend.
However, despite these charges, pre-pay cards are good for people who are bad with money – or for giving to teenagers, for example.
8. Credit score rebuilding
Taking out a credit card can help you to build up your credit score. Having no history of borrowing money – and paying it back – can stand against you when you try to get a mortgage. So opening a credit card, even if you don’t use it much, is better than having savings and no credit history.
If, however, you already have a poor credit rating, with CCJs and defaulted payments, then you need to repay your outstanding debts before you can work on you credit rating.
Once you’ve done this, you could take out a card designed for people with poor credit. While the interest rates are extremely high – more than 50 per cent in some cases, to reflect the risk they are taking with you – if you use it sensibly and stay on top of repayments you can rebuild your credit score.
Credit cards that offer cash back on purchases and other rewards can be great – but make sure that you pay the maximum balance off each month as the interest is always more than the reward.
Make sure you know whether the interest on purchases is accrued at the end of the month or from the time that the payment is made.
These can be good if you’re disciplined, as you will incur little or no interest and can gain benefits such as air miles. But you will need to spend big. For example you would need to spend around £50,000 to earn enough air miles to get to New York and back with Amex. On the other hand, it wouldn’t take too long to build up enough for a European trip.
These reward packages can be very tempting but you need to be careful not to end up with a bad deal for the sake of a reward scheme. Or ending up overspending, and incurring interest, just to get more air miles, or cash back.
If you’re late on your payments then you will be fined up to £12 (this was capped earlier this year by the OFT). While this might not seem like much, you also need to consider the damage you will be doing to your credit rating.
Setting up a direct debit to pay the minimum amount will save you from late payment fees and the detrimental effect on your credit score.
Contact us for more advice or to find the right card for you.
