Written by David Black, banking guru at independent research company, Defaqto, 6th December 2006.
Credit cards are great if used intelligently, but sadly many people rack up expensive debt on their plastic and then struggle to pay it off. This need not be the case if you take the trouble to seek out a credit card with a 0 per cent interest rate, or if you are not eligible for one of these, a card which has a consistently low charge rate, known as a ‘low lifetime rate.
Competition is rife amongst credit card providers as they strive to attract new customers and this factor provides opportunities for those who are willing to shop around.
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The first thing to do in order to decide which credit card is best for you is to decide how you intend to pay off your balance:
- If you always pay off your entire balance every month, you should consider a credit card which rewards spending.
If you always pay off your outstanding balance every month, there are a range of cards offering rewards and these will include cash back, airmiles, shopping rewards and point schemes. In respect of cash back cards, note that many are now tiered in terms of expenditure reward generosity on differing layers of spending, and you’ll need to examine the details carefully.
- If you do not always pay off the entire balance your primary concern should be the cost of borrowing, as this will vastly outweigh any potential rewards on offer.
For those who don’t always pay off outstanding balances each month, many cards offer 0% introductory rates on purchases, balance transfers, or both. The introductory periods vary, but typically range from five to twelve months.
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In respect of 0% offers on balance transfers, there are two things to be aware of:
- The amount that you are permitted to transfer to a 0% deal may not be as much as you want (providers are reining back on their largesse in this area)
- The majority of providers now charge a fee on the amount transferred and this tends to vary between 2% and 3% of the amount transferred. There are still a handful of providers who do not charge a balance transfer fee, so look for one of these.
There’s another factor too – your credit rating.
If you’re in well paid employment, have lived in the same place for ages and have no blemishes on your credit record, this should not be an issue as most providers will be only too happy to service your financial requirements.
However, for those not fortunate enough to be in that happy position, applying for credit can lead to a series of rebuffs. Credit card providers are increasingly offering a range of card propositions aimed at those with differing credit ratings.
They are also moving towards ‘risk pricing,’ whereby they will adjust the rate offered according to each applicant’s perceived creditworthiness: so you may not get offered the advertised rate.
Bear in mind:
The headline rate offers will often be limited to those with good credit ratings and that every time you apply for a card, a note will be added to your credit report, even if the application is unsuccessful. Generally, it’s a good idea not to apply for too many cards over a short space of time, as doing so may jeopardise future applications.
There are also low flat rate cards available which offer rates well below standard (non-introductory) rates available elsewhere, but these are generally only available to those with good credit ratings.
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I’ll leave you to ponder three final thoughts.
Credit has to be repaid.
If you only make the minimum required repayment, it will take many years to repay the balance and the amount that you’ll end up paying in interest will be massive.
Unsurprisingly credit card providers like to maximise the amount of interest that their customers pay them. Try and repay a higher percentage of the outstanding balance if and when you can.
The credit card market does not reward loyalty.
Introductory offers and reward schemes are designed to attract new customers. At the expiry of introductory rate periods, you will be moved to the standard rate which will prove considerably more expensive.
Similarly, it is not unusual to see the attractiveness of reward schemes watered down over time. The message from this is clear. Just because the credit card deal you secured was good at the time that you applied for it does not mean that it will remain so.
Review your credit card on a regular basis. Bear in mind that it can take up to a couple of months from application until a new card is actually received, so it is best to plan ahead.
Depending on your circumstances, it may pay to have more than one card.
If you transfer a balance to a 0% deal and use the new card for normal expenditure you may find that you’re paying a lot of interest on your purchases.
If this is the case get two different cards: one for the balance transfer element and another for ongoing expenditure. It may also be worth having more than one reward card, for example, to take optimum advantage of the tiered structure of cash back credit cards or to take advantage of enhanced cash back on specific expenditure.
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