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Your Money > Personal Finance Articles > How to win...
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By Naomi Caine
We are a nation of credit junkies. Our personal debt mountain is now so big - at about £1.1 trillion - that Mervyn King, the governor of the Bank of England, warned last week of a "potentially large social problem". But credit cards are not all bad. They are convenient, flexible and can be cheap. You just have to pick the right card – and use it sensibly. You should start by following the six golden rules for card sharps.
You should compare APRs, because the card with the lowest APR is generally the least expensive. But interest calculation is a black art. Most companies, for example, channel your payments to the most expensive debt first. So, you could pay more in interest with one card than another, even if the interest rate was exactly the same. Nationwide, HSBC and First Direct are the commendable exceptions. You also have to watch out for companies that set the interest rate according to your credit score, known as risk based pricing. They might advertise a "typical rate" but you might not turn out to be a typical customer. The best way to choose a card is to work out first how you will use it, so we've selected the best deals for different types of credit junkies. Goody-goodies If you pay off your balance in full every month, the interest rate is pretty irrelevant, because you are never going to pay interest. Most cards give an interest-free period of up to 59 days, so you can effectively borrow money for nothing. Goody-goodies therefore need a card that gives something extra: they need a cashback credit card. Every time they spend on the card, they get money back, usually between 0.5% and 1% of all spending. The minimum is typically £5 cashback a year. Cashback cards only really make sense for people who pay off their balance in full each month. If you run up a debt, the interest payment will almost certainly wipe out any cashback benefit, especially when you consider that cashback cards often have slightly higher interest rates than other cards. Some cards give more cashback the more you spend. Others reward people who don't spend so much on their card. If you want a straightforward cashback card, then have a look at Egg Money. It pays 1% cashback on all spending and the typical interest rate is 6.9%. There is no annual fee. American Express also has a couple of good cashback credit cards. Amex Blue has a cashback offer that runs for three months. You get 1% cashback for the first £2,000 you spend in the card and then 2%. The standard cashback rates are 0.5% and 1%. The typical interest rate is the same as Egg Money at 6.9%. But you could be offered 9.9% or 14.9%, depending on your credit score. If you spend less than £500 on the card each year you will have to pay an annual fee of £15. You should also be aware that you have to earn at least £12,000 a year to qualify for an Amex Blue card. The Amex Platinum card insists on a higher income of £20,000 a year. Again there is a £15 annual fee if you don't spend at least £500 a year. The typical interest rate is slightly higher at 8.9%, but you can get more cashback on the standard rate. Amex Platinum cardholders get 0.5% up to £3,000, 1% up to £7,500 and then 2% on all further spending. Debt switchers Are you paying too much interest on an old debt? If you have run up debt on a credit card that charges a high rate of interest, you can simply switch the balance to another card. There are several 0% balance transfer deals, but they typically only last for nine months. Check out Virgin Mastercard, Marbles Internet and Abbey's Balance Transfer card. Halifax One Visa, though, charges 0% on balance transfers for a full 12 months. If you transfer a debt to Capital One's Platinum Mastercard you will pay 0% interest on your old debt until September 1 2007. If you don't think you'll clear the debt in nine or 12 months, or remember to switch to another cheap deal, you can opt for a card that charges a low rate for as long as a takes to clear the debt. The British Airways American Express card does not charge an annual fee - and you can earn air miles. If you transfer a debt to the card you will pay annual interest of 4.9% until you have cleared the balance. The Intelligent Finance Life-of-Balance credit card is another option. You pay interest at 4.95% for the lifetime of the debt. Or you can try Lloyds TSB Advance, which charges 5.5% until you have paid off the transferred debt. Watch out for balance transfer fees. Many firms now charge 2%-3% of the balance when you switch the debt, usually up to a maximum of £35 or £50. However, you can still usually save money by moving to a special deal. The sums might not add up if you spend on the card. The rate for purchases might not be as good as the rate for balance transfers. And remember that most companies channel your payments towards the most expensive debt first. Big spenders Big spenders should look out for low rates or even 0% interest on purchases. But only if you can pay off your debts – or switch to another card - when the cheap offer expires. If not, you could end up paying interest of 15% or 16%. Most 0% deals run for six, nine or sometimes 12 months. Obviously, the longer the better. Sainsbury's Bank is charging zero interest on purchases for 12 months, but you must apply for the card by the end of the month. You can get 0% on purchases for nine months with Mint, Abbey's Shopping Credit Card or the Nationwide Classic Visa. If you want to play the card companies at their own game, you can have one card for purchases and one card for your balance transfers - and keep on switching. Mint, however, offers the same 0% deal for balance transfers, plus a handling fee. Bored borrowers Some people can't be bothered to keep switching, so they would be better off with a card that charges a low standard rate. You won't get a 0% deal, but at least you won't get caught out when the interest rate rockets when the special offer runs out. The Capital One No Hassle card is designed especially for you. It typically charges just 6.9%, although you might not get the advertised rate if you don't fit the company's profile. If you are unlucky, try the Flat Rate Credit Card from Intelligent Finance, with a typical rate of 8.9%. Again, however, you might be offered a higher rate of either 12.9% or 14.9%. Co-op Bank's Clear card is another option; the standard rate is 9.9% - and that's the only rate on offer. Yahoo Finance carries more information on credit cards, or you can try websites such as www.which.co.uk , www.moneyfacts.co.uk or www.moneysupermarket.com. |
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