Choosing the right credit card
Last updated on 8 February 2016
A credit card can be more than just a convenient way to pay for goods and services. It could let you borrow interest-free, give you extra protection if the company you buy from goes bust or goods aren’t as described, or give you money back on your spending. If you owe money on a credit card you could move it to another card and pay no interest (for up to 40 months, depending on the deals available at the time).
How to choose a credit card
If you always pay your credit card bills in full each month you could choose a cashback credit card that gives you back a percentage of your spending. With a balance transfer credit card you could transfer a credit card debt and pay no interest for several years. Alternatively, if you regularly borrow on your credit card you could look for the lowest interest rate. A purchase credit card could mean you won’t pay any interest on a large purchase for up to 27 months.
Types of credit card
With a cashback credit card you get back a percentage of most things that you buy on your card. This is typically around 0.25% to 1.25% but sometimes more during an introductory period or for particular types of spending. Cashback is normally paid once a year on to your credit card.
With a points credit card you get points for each pound you spend on your credit card. These can then be exchanged for things such as vouchers, goods and services and days out. You can also earn Avios points (formerly AirMiles) that can be mainly used for flights and hotels.
If you owe money on your credit card it may be worth moving this debt to a 0% balance transfer card where you will pay no interest on the debt for up to around three years. You normally have to pay a balance transfer fee of around 1% to 3%. If possible clear the balance you have transferred within the 0% period as after that your interest rate will jump up to the card's standard rate (usually around 15-20% APR).When the 0% deal ends you may be able to transfer the remaining balance to another 0% balance transfer credit card.
Some 0% balance transfer cards charge lower balance transfer fees in return for shorter 0% periods. Make sure you pay at least the minimum payment each month and don’t exceed your credit limit or you could lose your 0% interest rate. Another option is a lifetime balance transfer card, which charges a low interest rate until you pay off the money you owe.
With a 0% purchase credit card you could buy something on your card and pay no interest for up to around two years, depending on the deals available at the time.
Credit repair credit cards
These cards are for people with a poor or limited credit history and can help you rebuild or improve your credit rating. If you pay off your bill in full each month you’ll avoid the higher interest charged on these cards. A Direct Debit should mean you won’t miss monthly repayments. If you can build up a good credit record with a credit repair card you are more likely to be offered a standard credit card (which is likely to offer you a higher credit limit and lower rates of interest) in the future.
How to apply for a credit card
When you apply for a credit card the card provider checks your credit rating with a credit reference agency to help it decide if it will give you a card. Each time you apply for credit a search is recorded on your credit file. Too many searches in a short time can make it harder to get further credit.
With some credit cards you need to have a minimum income before you will be considered for a card.
Credit card interest rates
Credit cards are advertised using representative APRs. The APR or annual percentage rate is the annual rate of interest charged by your card provider if you don’t pay off your bill in full each month.
At least 51% of people accepted for the card will get the representative APR. So if the APR is 18%, this is the rate of interest these people will have to pay if they don’t clear their credit card bill each month. If you aren’t one of these people, you may still be accepted for the credit card but charged a higher interest rate than the one advertised.
Credit card charges
Some credit cards charge you an annual fee. Work out if it’s worth paying a fee for the benefits the card may give like, cashback or travel insurance.
If you pay late or exceed your credit limit you will usually be charged a £12 fee. Late payments can also have an impact on your credit rating and make it harder to get credit elsewhere.
It’s rarely a good idea to take cash out of a cash machine with a credit card as you will be charged a fee and normally will be charged interest on the withdrawal even if you pay off your bill in full.
Alternatives to borrowing with a credit card
Other forms of borrowing include bank loans, loans from credit unions, peer-to-peer loans and authorised overdrafts.