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Make sure your plastic matches your wallet
By Nathalie Bonney
At this time of year it's all too tempting to whack all your seasonal expenses straight onto plastic, so it's worth making sure that you're using the right credit card for your circumstances.
Research from price comparison website uSwitch shows that providers are squeezing extra juice from their customers with 44 credit cards - that's 30% of the market - cutting their interest-free period for new customers from 56 days to 50 days.
Balance transfer fees and the cost for withdrawing cash have gone up, and there are fewer 0% purchase cards available.
None of this should deter you from looking for a better deal though. Not only are credit cards a great way of spreading your costs at expensive times of the year, but they are also a safe and convenient way to pay for goods over the internet or phone. Under section 75 of the 1974 Consumer Credit Act, cardholders are protected for all purchases over £100 (but less than £30,000) if the goods or services they buy are faulty or the company goes bust.
The right card for you
Pay off as much as you can afford each month or divide the debt into equal monthly payments to ensure that by the time the 0% offer expires - typically after 12 to 15 months - the balance has been repaid. If you can't afford to do that then put a note in the diary stating when the 0% offer ends and then look for another to transfer it over to in plenty of time.
The larger your debt, the more attention you need to pay to balance transfer fees. However, don't be swayed by lower fees if the balance-transfer period is short - say six months - unless you're positive you can pay off the debt in that time.
Although these cards are designed for paying off debts, there's nothing to stop you spending on them. Indeed, this is where the card issuer really stands to make money, so you need to check your terms and conditions closely if you plan to hit the shops with a balance transfer card as new-purchase terms may not be so competitive.
Some cards do offer 0% on balance transfers and new purchases. The Halifax One card is a good example as it offers 0% on both for 10 months.
Most credit cards employ what is known as a negative repayment hierarchy - a sneaky little trick that costs you money. The chances are your card will charge you three different rates for the three different uses for your card: repaying balance transfers, making a new purchase and withdrawing money. With a negative repayment hierarchy your monthly repayments go towards paying those debts with the lower rates, allowing those with higher rates to carry on growing.
Nationwide Building Society and Saga credit cards are two notable exceptions that use a positive payment hierarchy, meaning your most expensive debts are paid off first.
For those who need a card to shop with as well, it's therefore usually best to get a card designed for spending. Most cards offer interest-free periods of between 50 and 59 days, but again if you aren't convinced you'll be able to pay the bill off every month, a 0% card makes sense to ensure you don't pay interest on the balance.
Everyday spending
The American Express Platinum Cashback credit card is consistently top of the best buy tables, thanks to its introductory 5% rate; however, after three months, its rate drops in line with other cashback cards. Whichever type you choose, make sure it matches your own spending habits. London-based commuters may be drawn to the Barclaycard One Pulse Special, which gives 5% cashback on Transport for London, while those who use their card to fill up the family car would get 3% back on Shell fuel with the Shell Mastercard.
In the same way, don't pick a reward card because it gives a lot of points if you won't use them - it's no use getting a Lloyds TSB Airmiles Duo Amex, when you've got a fear of flying. Sainsbury's research reveals that many cardholders don't make use of their collected points: around 8.9 million people have collected rewards linked to their credit cards in the last year but only three million have bothered to claim them. The main reason for not bothering was that the financial reward was deemed too small.
However, you can boost your points or amount of cashback by putting bills onto your credit card too - as long as you are able to clear the balance in full before the end of the month. Survey results from American Express show that just 3% of respondents pay their household bills by credit card, preferring to use direct debit, cheques or debit cards instead.
Chopping and changing credit cards doesn't suit everyone as it requires you to be organised and disciplined. If you are, the best option is a 'plain vanilla' card that has a low standard rate. The average APR is now 17.7%, according to uSwitch figures, but if you look specifically for a low-rate credit card then you can find APRs below 10%. Market leader Barclaycard Simplicity Visa, for example, only charges 6.8%.
This kind of card isn't an excuse to put your feet up though: be aware that rates can change and cash withdrawal rates will be significantly higher, with minimum charges and fees applying. Alternatively, if you have debts that might take a while to repay but you don't trust yourself to do the research, get a low-rate card.
Consumers are increasingly taking their plastic friend on holiday with them, but while you may want to switch off, card-wise you still need to keep your wits about you. Paying for goods with your credit card often gives you a better exchange rate, but be aware that you will usually be charged a foreign usage charge of up to 3% for every transaction or purchase. However, some card issuers, including Abbey, the Post Office, Thomas Cook and Nationwide, all offer cards that don't charge this fee.
Once you've worked out which kind of credit card (or cards) suits you best there are a few other pitfalls to navigate. First of all, check what average percentage repayment (APR) you are actually being charged - the starred APR rate is the 'typical' rate you'll get, the actual rate you pay could be subject to a credit score.
Your credit status affects what rate you receive, and although current rules dictate that two out of three borrowers must receive the typical APR, this only applies to approved borrowers.
Payment protection insurance
Finally, while credit cards may well be your flexible friend you should never stretch this flexibility to the limit and use them to take money out of the hole in the wall. This can work out expensive, even with those cards offering the lowest rates on cash withdrawals. Not only are rates typically higher than new purchase rates (often as much as 30%) but there's usually a minimum cash advance fee of £2.86 and no interest-free period, so interest starts accruing as soon as the money is in your hand. If you're strapped for cash, speak to your bank about an overdraft instead.
Take advantage of the 0% periods, cashback and rewards but don't give away money to your card issuer unnecessarily by falling into their various money traps.
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