Credit Cards |
|
Your Money > Credit Cards Articles > Money for nothing...
|
By Richard Evans
This is because many card issuers offer attractive introductory offers such as allowing you to make purchases interest-free for a year, or even longer. Other deals let you pay off the balance on an existing card by transferring it to a new one, again with no interest to pay for many months. "If you take out a credit card that lets you make purchases interest-free for a year, you can use it to buy the everyday items you might normally use your debit card for," says Robert Kenley, the credit card specialist at moneysupermarket.com, the price comparison service. "At the end of each month, all you have to pay is the minimum amount, which is usually 2.5 or 3 per cent of the outstanding balance. You can keep the money you would otherwise have used to pay off the balance in full - or spent immediately on a debit card - in an interest-bearing account or even one linked to an offset mortgage." By allowing you to borrow interest-free, the credit card company lets you hang on to your money for longer and put it to good use. For example, many deposit accounts pay up to 6.5 per cent interest, while using the money to offset your mortgage - reducing the net balance on which you pay interest - could mean an effective return of about 9 per cent, thanks to the tax efficiency of these loans. "A lot of people could take advantage of this 'credit card offsetting'," says Mr Kenley. "Some will be put off by worries over taking on more debt or getting caught out if they run into financial problems. But if you're confident and disciplined about money, this method could work for you." The key thing to remember, he adds, is to pay off the accumulated balance in full when the 0 per cent offer expires. "For example, the longest zero-interest offer available at the moment is from the Halifax at 15 months. But if you don't clear the balance in full at this time, the interest rate shoots up to 15.9 per cent and you risk undoing all the good work you've done." So it's vital to keep the money you would otherwise be spending set aside to meet the credit card bill when the time comes - if you spend it instead, you will pay heavily for the privilege. "There's usually no fee on 0 per cent purchase cards, so your borrowing is completely free of charge - there's no downside if they are used sensibly," says Mr Kenley. "Don't miss payments or use these cards for other transactions such as cash advances. They are ideal for new purchases but I wouldn't use them for anything else." Another way to benefit from credit card offers is to take advantage of one of the many balance transfer deals available at the moment. These will also charge you no interest for a set period - often a year - although this time there is usually a cost in the form of a balance transfer fee, typically 2.5 or 3 per cent. "Even taking the fees into account, this is one of the best ways of borrowing money in the short term," says Mr Kenley. You could transfer the balance built up on your "0 per cent on purchases" card, prolonging your interest-free period even further, or you could shift the balance on a card on which you were already paying interest. "In the latter case, having an interest-free period makes it easier to save up to clear the loan. This is better than using other 'debt consolidation' products," he adds. You can also transfer non-credit card debts, such as personal loans or the balance on store cards, where interest rates can be very high. "Just ask your provider to arrange this," says Mr Kenley. "MBNA even allows you to transfer money out of your credit card into a current account for a year, with just a 3 per cent transfer fee, which is added to the loan. If you do this you are raising finance at a cheap rate. But again the key is to repay the whole balance when the year is up." Asked to pick out some good deals, he points to balance transfers from Virgin Money (15 months, with a fee of 2.98 per cent) and Egg (0 per cent until 1 January 2009, 3 per cent fee) and one-year deals from MBNA, Lloyds TSB (both also with a fee of 3 per cent) and Abbey ( 2.5 per cent fee), while for purchases HSBC and First Direct also offer 12 months interest-free. "I've calculated that a cardholder with an average outstanding credit card balance of £2,088 and making the minimum monthly repayment of 2.25 per cent on a card charging 16.9 per cent APR would save £312 per year in interest by switching the balance to the Virgin card," he adds. "Another Halifax card offers 12 months at 0 per cent on both balance transfers and purchases, but I would recommend using the best separate cards for each purpose, rather than one combined," says Mr Kenley. There are even two balance transfer deals that charge no fee, says David Black of Defaqto, the financial data company. These are from Ulster Bank, which won't charge interest for six months, and Britannia building society, which offers five months. Those who wish to exploit the credit card companies' generosity to the full will need to keep switching existing balances to new cards and taking out other cards on which to make interest-free purchases. While this is perfectly possible, you will need a perfect credit rating, experts warn, particularly as the credit crunch has made many banks much more cautious about their lending. "Issuers are tightening their lending criteria, so you may not be offered the credit limits you need to make this method work," says Mr Black. Many are also increasing their fees, he adds. "Almost without exception, the big banks are being more careful. Some, such as Lloyds TSB, are focusing more on existing customers, so it may be worth applying for cards from companies that you already have a relationship with." Even if your application is approved, you may not be offered a high enough limit for your needs. "There's nothing worse than applying successfully for a card, only to get, say, an offer to transfer just £700 and leaving a footprint on your credit record," says Mr Black. There are several steps you can take to keep your credit record in tip-top condition. "Your credit history shows what credit you have access to, even if you are not actually using it," says Jill Stevens, the director of consumer affairs at Experian, one of the major suppliers of credit reports. "So it is always a good idea to cancel cards whose offers you've used up. If the issuers you are applying to think you can get credit elsewhere, they may decline your application or impose a lower credit limit, both for commercial reasons and in line with pressure from the Government for 'responsible lending'." Having a wallet full of dormant plastic can significantly affect your chances of being accepted for new cards, she believes. "And before you apply for credit of any kind, get a copy of your report. Any adverse records can affect your ability to take out new credit - and also the interest rates you are offered." Mr Kenley, meanwhile, stresses the importance of always paying bills on time to avoid blemishes on your credit history. "Set up direct debits for bill payments - this makes it almost impossible to miss the due dates. You should also ensure that you're on the electoral roll, which lenders use as a check on your identity, and don't move your current account too often." It is best to have a reasonable number of credit products and use them sensibly, he believes. "People think that having less access to credit is better for their credit rating, but this is not the case." Ms Stevens has some encouraging words for canny borrowers who want to benefit from an endless stream of zero per cent offers. "It can be done. It depends on the lender and how much detail on the credit report they look at. Don't forget that they also make money from retailers. Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||