Work out what you need
By Becky Brennan
Do you want to pay off all your card balance each month and earn rewards or cashback on what you spend? Do you find that a balance has built up on your card and want to pay as little interest as possible while you clear it? Perhaps you always have a balance outstanding on your card and want to make sure you're paying low interest longer-term.
Cashback and rewards
If you pay off your balance each month, a card that offers rewards and cashback can add value to your spending. Cashback cards (including the American Express Platinum card) refund between 0.25% and 2% of the amount you spend on purchases, while reward cards give a certain number of points that can then be converted into offers - ranging from supermarket vouchers to free flights. If you rarely stay in hotels or fly, you won't find a credit card that offers free accommodation or flights particularly useful.
Rewards v APR
Rewards offer something for nothing, but they tend to come with high APRs. So if there's ever a chance you won't pay your balance off, or your circumstances change and you don't switch cards, it's easy to spend far more in charges than you ever made from rewards. In these instances the APR is key.
If you've already got a balance on your card, a 0% balance transfer rate can save you money while you work on clearing the debt. The time allowed for transfers at a promotional rate is usually limited, for example, to just the first six weeks from opening the account.
Many cards now make a charge for balance transfers, usually around 2% of the outstanding balance. Weigh up the total cost of the transfer, and whether having a few extra months is worth it. If not, pick the longest balance transfer you can - which is currently twelve months with the MBNA Platinum Plus card.
Interest free - but for how long?
Be aware when your 0% offer will end, and of the standard interest rate for balance transfers. If you will have an outstanding balance at the end of the introductory period, start shopping around for another 0% deal before it ends. Some cards offer a low interest rate for the life of the transferred balance, including the Morgan Stanley Platinum card, with a rate of 3.9% APR until 01/07/2010. Others, like the Co-operative Bank Flat Rate Gold Card offer a fixed rate of 9.9% for five years. They may be worth considering if you don't want to have to think about changing cards regularly.
It's good to work out which credit card will meet your needs before applying for one
If you have a big expense to shop for, then choose a card that has 0% on purchases, but make sure you've budgeted to pay it off as soon as possible, and take into account the rate after the introductory period. Some cards, such as the one provided by House of Fraser, may have a typical APR as high as 29.3% variable.
If you opt for a higher APR and cannot pay it off in time, you will need to find a good 0% balance transfer when the time comes. Alternatively, if you're likely to lose track of balances and transfers, you may want to consider a card such as the Post Office's Two-in-One card, which offers 0% on purchases for the first six months, then the opportunity to transfer balances of between £500 and £2,000 to a loan-like facility at a discounted interest rate of 6.8% for 12 months.
There are other features of a card that can affect how much you pay. Some charge an annual fee, for example. The Citibank AAdvantage card charges £25 (waived in your first year). Bear in mind that some card providers, including Lloyds TSB, Halifax and Bank of Scotland operate risk-based pricing. The interest rate they offer may depend on how much of a risk they perceive you to be.
Most card providers now provide a standardised summary box to lay out the key features of the card. But make sure you look at the terms and conditions too.
There's also often a large difference in the number of days you have to pay your card debt before interest is charged on purchases. Egg's card offers 45 days interest-free, and Cahoot's card 46 days, for example, while the Bank of Scotland's One Card offers 59 days. Bank of Scotland's Little Black Card charges interest on purchases from the day of the transaction.
If you use the card to take out cash, interest is usually charged from the date of the transaction, with one exception being HSBC, which offers a 56-day interest-free period on cash withdrawals. Interest is usually higher than for purchases and balance transfers, often around 20% to 25%. The Barclaycard Simplicity card, for example, which has a low 6.9% rate for balance transfers and purchases, charges 25.9% APR on cash withdrawals. Go for one that offers a lower interest rate on cash withdrawals, such as the Co-operative Bank Clear Card, which charges 8.9% APR, or the Abbey Flat Rate card which charges 10.9% APR.
You'll also be charged a fee for withdrawing the cash, usually between 1.5% and 2.5% of the amount you withdraw. One exception to this is the Abbey Flat Rate Card. If you travel abroad regularly, don't forget that most cards charge around 2.75% commission on overseas transactions. Nationwide's cards, however, are free to use abroad.
If you're transferring a balance and want to use the same card for purchases or to withdraw cash, take care. 'Adverse' payment hierarchies on many cards mean that you pay off the lowest interest transactions like balance transfers first, while higher interest charges on transactions continue to build up. Exceptions include HSBC and Nationwide, which have a positive payment hierarchy, clearing the transactions with a higher rate before those with a lower one.
The Co-operative Bank's Clear Card offers free travel accident insurance up to £100,000 and medical and legal assistance abroad, as well as discounts on holidays and car rental. The Nationwide Classic card offers free purchase cover for loss, theft or damage to most purchases over £50 and a free 12-month warranty on selected goods, as well as commission-free travel money and free travel accident insurance up to £50,000. Check the terms carefully though, as there are often strict criteria that need to be fulfilled.
However, credit card offers can be as changeable as the winter weather, so if you're not happy with your current provider, check out the best buys on Interactive Investor and find the plastic that's fantastic for you.
With thanks to Interactive Investors. Please note that this advice is meant for people living in the United Kingdom. Always seek expert opinions before making any financial committment.
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