Golden dos and don'ts of credit cards
Credit cards are a financial staple for many Brits. But exactly how you choose to use your plastic can make a huge impact on your wallet. Here we look at when your credit can be your best flexible friend - and when it's the very last payment method you should use.
DON'T! Assume your credit card is good for every transaction
There are times when your credit card should be given a very wide berth. For example, cash withdrawals are generally charged at much higher rates of interest than standard purchases.
Recent MoneySupermarket research found that the Annual Percentage Rate (APR) is typically charged at between 23% and 28%. This compares to an average credit card APR of around 17%.
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Many credit card providers also impose cash withdrawal fees of around 3%, with the majority specifying a minimum amount such as £2 or £3 per transaction.
What's more, the interest accrues from the date of the transaction, rather than the next payment date, so there is also no escaping the cost of cash advances - even if you clear your balance in full with your next payment.
But a lesser-known fact is that the same charges also apply to purchasing foreign currency with your card, buying postal orders and even gambling online.
So, if you are planning to pay for your holiday money with your credit card this year, it could end up costing you a lot more than you expected.
If you have no other option, at least ensure you use a card that offers a low rate of interest across the board.
The Co-operative Bank's low-rate Fixed Rate credit card, for example, has a representative APR of just 9.9%(variable) for all types of transaction, including cash advances.
Meanwhile, the Barclaycard Simplicity card has a representative APR of 7.9% (variable) on both balance transfers and purchases and charges 15.8% (variable) on cash advances.
DO! Use the best card when going on holiday
If you are planning to use your credit card to spend on when you arrive overseas, instead, it's still worth shopping around for the best one. This means a card that doesn't charge foreign exchange fees (also known as loading fees or foreign transaction fees) every time you hand over your plastic to make a purchase which are usually levied at between 2.75% and 2.99%.
For example, the Sainsbury's Gold credit card, will not charge foreign exchange fees or for withdrawing cash from an ATM. And, unusually, it will not charge interest on cash withdrawals, so long as you repay your statement balance in full.
The Sainsbury's card does come with a £5 monthly fee offers cardholders a worldwide annual travel policy covering a family of up to six children. And, unlike many other standard policies, this includes cover winter sports.
The representative APR is a very low 9.94% (variable) - though you will need a good credit score to qualify.
Look also at the Post Office Platinum card which doesn't charge for over-the-counter purchases abroad. And if you buy your travel money through the Post Office, there is no cash advance fee either. However it does charge on ATM cash withdrawals - at the greater of £3 or 2.5% of the amount withdrawn.
In any case though, cash withdrawals on credit cards are usually best avoided. Not only do you run the risk of getting into debt, but interest is usually higher than on purchases and charged from the minute the cash is withdrawn.
DON'T! Leave a balance languishing on a card
The average annual interest rate on a credit card is a staggering 17.32% according to Bank of England figures - and many charge north of 18%. But there is no need to pay this kind of interest on any existing balance. Instead, transfer it to a card that offers 0% interest for a given period of time.
The current market leader in these stakes is the Barclaycard Platinum with Extended Balance Transfer card which offers an incredible 22 months at 0% on balances transferred, in return for a 2.9% fee. It also offers 0% on purchases for the first three months. After the introductory period ends, the card has a representative APR of 17.5% (variable) so you will need tobe sure you have cleared your balance by then.
The Halifax Balance Transfer credit card is another winner in these stakes, offering 22 months at 0% on for a 3.5% fee as well as 0% on purchases for the first three months.
While the terms are not quite as favourable as Barclaycard's, it does offer perks including deals and discounts on travel, entertainment and shopping.
DO! Reap rewards if you clear your balance every month
Paying off your credit card balance every month is always good practice as it is good for your credit score and you don't run the risk of getting into debt. But the benefits run deeper than this.
There is a whole raft of cards that actually pay you for spending, either in terms of rewards or even cash back in your pocket.
The American Express Platinum Cashback for example, offers 5% cashback on purchases for the first three months on spend of up to £2,000 - and up to 2.5% thereafter. The interest rate if you don't clear your balance is 14% (variable) but, once you have added in the £25 annual charge that the card levies, this pushes the APR up to a representative 18.5% (variable). However, so long as you clear the balance, no interest will apply and you will be left only to make a profit.
But depending on how and where you shop, it could be better to earn points rather than cash. With the M&S credit card, for example, you earn one point for every £1 spent in store, and one point for every £2 spent elsewhere.
Once you have 100 M&S points, you'll get a £1 reward voucher to spend in store. The M&S card also offers 0% interest on purchases for the first 15 months, after which time a representative APR of 15.9% (variable) applies.
REMEMBER! There are other ways to pay!
Especially if you are turned down for a 0% credit card deal, using plastic may not always be the best way to pay.
Personal loan rates for example are the cheapest they have been for almost five years. The best on the market is currently Sainsbury's Shopper Personal loan which offers a representative APR of 5.9% providing you want to borrow between £7,500 and £15,000 over one to three years.
If you only need a smaller amount, however, it may be worth switching your current account to take advantage of one of the market-leading overdraft offers.
First Direct's 1st Account, for example, offers a £250 interest-free overdraft buffer zone, as well as paying new customers a generous £100 switching incentive.
Nationwide's FlexAccount, meanwhile, charges 0% on arranged overdrafts for the first three months, allowing you to avoid interest charges altogether, so long as you pay the debt off within the interest-free period.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.