Before applying for a credit card you need to think about how you will use it - are you looking for a card to spend on and if so will you be able to clear your balance in full each month? Maybe you've already got an outstanding debt on another card and are looking to make a balance transfer, but do you want to spend on the card as well? These are all vital questions which will help identify the best deal for your needs. Picking the wrong card could prove an expensive mistake.
Here we explain the key features of a credit card, how the main types of card work and who they are suitable for so that you apply for the right deal.
Before you start comparing credit card deals, here are a few basics you should know about.
- A credit card enables you to make purchases without the money being taken out of your bank account immediately. Instead you receive a monthly statement showing how much you owe and a date by which you must make a payment.
- You do not have to clear your balance in full, but if you don't you will be charged interest and there is a minimum amount you will need to repay each month.
- You will be charged a penalty fee (normally £12) if you are late making a payment, you miss a payment or exceed your credit limit.
- Credit card providers advertise a 'typical' annual rate of interest. This must be offered to at least 66% of successful applicants, but it means a third could be offered a different rate so you may find that the interest rate you are charged is higher than the one you thought you were applying for.
- Providers check your credit rating when you apply for a credit card and the best deals are only available to those with excellent credit histories. You need to bear this in mind as there is no point in applying for a card you won't qualify for - it will only hurt your credit score further. Our Smart Search tool can help you identify which deals you are most likely to qualify for.
0% purchase cards
Who are they suitable for? Someone who wants a credit card to spend on, but who can't afford to pay off the balance in full at the end of the month.
The rates of interest credit card providers charge customers vary significantly, although the average rate is 17% - way above the Bank of England base rate which is 1.5%. If you aren't able to clear your balance in full the interest you'll be charged can significantly bump up the cost of your purchases. You should therefore look for a card that charges a low rate of interest. Best are interest-free deals.
A number of credit card providers have 0% introductory offers on purchases. This means that you won't be charged any interest on your debt during that period, giving you time to clear your balance.
However, the interest-free periods don't last forever - when they come to an end you will be charged the provider's standard rate of interest. You should therefore aim to have repaid the balance in full by the time the 0% deal ends. If you still have an outstanding debt at that time you will start accruing interest at the higher rate.
Marks & Spencer Money is offering one of the longest interest-free periods on purchases. Its 0% deal runs for 10 months. Once it ends however, the rate jumps to 15.9%.
Key things to check before you apply:
- How long does the 0% period last?
- What is the typical rate of interest?
- Is there an equal 0% offer for both balance transfers and purchases?
0% balance transfer cards
Who are they suitable for? Someone with outstanding debts on credit or store cards for which they are being charged a high rate of interest.
As well as offering interest-free periods on purchases, some credit card providers also have 0% deals on balance transfers.
With millions of borrowers having wracked up debts on credit and store cards, a balance transfer has become an increasingly popular reason to apply for a new credit card.
If you are being charged a high rate of interest on your current card, it can make sense to transfer the debt onto another cheaper deal. As with interest-free purchase cards the 0% offer doesn't last indefinitely - you will be charged the higher standard rate of interest once it ends so you should aim to clear your debt during the introductory period.
It is also worth noting that you will probably be charged a fee for making a balance transfer. This is likely to be between 2% and 3% of the balance you're moving onto the new card and it will be added to the total debt so you won't have to pay it upfront (given that the average interest rate on credit cards if 17%, paying a transfer fee will probably still work out cheaper than if you kept the debt on your existing card).
The Virgin Credit Card has the longest 0% offer for balance transfers at 16 months. There is 2.98% balance transfer fee and the typical rate of interest, which you'll be charged once the interest free period ends, is 16.6%.
How much could this save me? Say you moved £2,000 onto the Virgin Card from a card charging the average interest rate of 17% and you made monthly payments of £125, you would save £227.01 in interest over the 16-month 0% term. You would also only have £59.60 left to repay, compared with £256.17 if your debt was still on the 17% card.
WARNING - The Virgin Card also offers a six-month interest-free period on purchases but do not be tempted to use the card for both purposes. After six months, any purchases you have made will start accruing interest at the standard rate of 16.6% and your monthly repayments will go towards repaying the transferred balance first. So you will actually start paying for your purchases until you have totally repaid the debt you moved over from your old card.
So what if I want a card to spend on as well as transfer a balance onto?
If you want a 0% credit card to use for both purposes you need to ensure that the interest-free offers last for the same length time to avoid being caught out by the payment trap explained above.
The Halifax and Bank of Scotland All In One cards are the best - they offer a nine-month interest-free period on both purchases and balance transfers. The balance transfer fee is 3% and the typical rate of interest is 15.9%.
Key things to check before you apply:
- What is the typical rate?
- What is the balance transfer fee?
- Is there an equal 0% offer for both balance transfers and purchases?
Low rate/long term balance transfer cards
Who are they suitable for? Someone who won't be able to repay their debt during an interest-free period and doesn't want to have to keep moving it from one card to another.
Not all credit cards charge high rates of interest - some have rates comparable with those on the leading personal loans. These can be worth considering if you are looking to pay down an existing credit or store card debt but know it will take longer than the interest-free periods that are available. They are also an option if you are looking for a card to use for spending and know that you won't be able to clear your balance during the interest-free period.
The Barclaycard Simplicity, offers the lowest rate at 6.8%. This is a lifetime rate applies to balance transfers and purchases and there is no balance transfer fee.
Another good alternative is the Capital One Fixed Rate Card. It's not quite as an attractive deal as the rate is slightly higher at 9.9% but this is still significantly lower than the average credit card rate. It is also fixed until August 1, 2012 and as with the Barclaycard deal there is no balance transfer fee.
Low rate cards are popular among those who have no credit or a poor credit history perhaps because they have changed addresses frequently, defaulted in the past or have CCJs on their file. Using a low rate card consistently can help you rebuild your credit rating but the rate you're offered may be different to the typical rate.
Key things to check before you apply:
- Does the low rate apply to balance transfers and purchases?
- Is there a balance transfer fee?
- Is there a cap on minimum income?
Cashback/reward cards
What type of user do they suit? Someone who pays off their bill in full every month.
Around 50% of all credit card users clear their balance in full each month and as such aren't charged any interest. If you are one of these people you may think it doesn't matter which card you have. However, some credit cards offer loyalty schemes, such as cashback, reward points, AirMiles, so why not get something back every time you spend?
For example, the American Express Platinum Cashback card gives 5% cashback for the first three months (up to a maximum spend of £4,000). You then earn 0.5% on the next £3,500 spent on the card, 1% on any spend between £3,501 and £10,000 and 1.5% an any spend above £10,000. So say you spend £1,000 a month on your card, you would earn £222.50 in cashback over the first year.
A general cashback card is always a good option, but you may find a better deal depending on your lifestyle. If you drive a lot, for example, the Shell MasterCard from Citi could be a good one as you get 3% cashback on fuel bought at Shell garages and 1% on any other spending. Alternatively, if you're a frequent flyer, the British Airways (BA) American Express Card may be more attractive. You get 1,000 bonus BA miles when you first use the card and one BA mile for virtually every £1 you spend.
WARNING - Reward cards are only worth considering if you clear your balance in full each month. If not, the interest you'll be charged will far outweigh the value of any benefit. The American Express Cashback card for example, charges a standard rate of 18.9%.
Key things to check before you apply:
- Can you take full advantage of the reward scheme?
- How long does the scheme last?
- What is the interest rate?
Fee-free foreign usage
What type of user do they suit? Someone who travels overseas regularly.
Credit cards can be particularly useful when you go abroad, but most providers will charge a fee each time you use your card - typically between 2.5% and 3% of the transaction amount. There are a few credit cards that don't have foreign usage fees so if you are a regular traveller opt for one of these - it can be surprising how much the overseas costs can add up to.
The best cards for regular travellers are Nationwide's Gold Card and the Post Office Platinum card as neither have foreign loading fees.
Key things to check before you apply:
- Are there any fees for use abroad?
- Do different fees apply in different countries?
- How can you get a replacement card if you lose yours while you're away?
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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