Credit cards - five dos and don’ts

Credit cards may be our ‘flexible friends’ but if we don’t use them correctly that friendship can soon turn sour.

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Unfortunately credit card providers don’t issue instruction books when they send you a credit card – so we’ve put together a list of five essential dos and don’ts to help you play your cards right. You can also watch our video: 'Avoid credit card interest and fees.'

Five dos:

Pay your balance in full each month… or at least pay as much as you can afford

If possible, you should aim to clear your credit card balance every month. That way you avoid paying any interest.

If you can’t afford to pay off the entire amount, repay as much as you can. Credit card providers only require a minimum amount to be repaid each month – often 2.5% of the outstanding balance or £5, whichever is greater. It may be tempting to pay just the minimum, particularly if money is tight, but this will prove a costly mistake. It will add years to the time it takes to be debt free and could cost you hundreds of pounds extra in interest.

For example, if you have a £1,000 debt on a card with an interest rate of 16.9% it would take you 16 years to clear the debt by repaying only 2.5% of the outstanding balance each month (or £5, whichever is greater). It would also cost you a whopping £970 in interest. However, by paying 5% of the balance each month you’d slash your repayment time to seven years and one month and pay just £337 in interest.

Pay by direct debit

Late or missed payments on a credit card debt will result in you being charged penalty fees. They can also have a serious impact on your credit score, harming your chances of gaining credit in the future. Paying monthly by direct debit is an easy way of ensuring you are never late making a payment.

Take advantage of 0% offers to battle existing debts

If you have a large debt on a credit or store card take advantage of a 0% balance transfer deal.

A number of cards offer interest-free periods on balance transfers. You will be charged a fee for moving a balance over from another card - usually between 2.5% and 3.0% - but this can be added to the debt so it doesn’t have to be paid up front.

You should aim to clear your debt during the 0% period because interest will be charged once the introductory offer ends.

Use your credit card to make money

If you’re able to pay off your debt in full each month then credit cards could actually make you a neat profit. In order to benefit you need a cashback or reward card. These cards reward you for the spending you make by either offering you cashback or through incentives such as air miles, shopping vouchers and more.

This type of credit card is only suitable if you clear your balance each month, otherwise the interest you are charged will outweigh the value of any cashback or rewards you receive.

Do be careful about which cards you apply for

Card providers look at your credit history when deciding whether they should lend to you – if you’ve missed payments in the past, have a county court judgment pending against you or don’t have a fixed address then you’re unlikely to qualify for the best deals. Our SmartSearch tool helps you find deals you’re more likely to qualify for based on your credit history while our article “How to improve your credit score” will help you get your credit rating back on track.

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Five don’ts:

Don’t use a credit card to withdraw cash

The costs are so high for withdrawing cash from a credit card so this is the biggest “no-no” of them all. The interest rate on a cash withdrawal is typically upwards of 25% and this is on top of a fee that is usually around 3% of the amount you withdraw. You will also start accruing interest from the day the withdrawal is made so it can’t be avoided even if you clear your balance in full each month.

Don’t be tempted by credit card cheques

Credit card cheques seem straightforward and convenient – just like regular cheques they are a means of paying for something when you don’t have cash and you can’t use your card. However, they are treated like cash withdrawals so the same higher interest rate and the absence of an interest-free period apply.

In addition, purchases made on a credit card are covered by Section 75 of the Consumer Credit Act which means that the card issuer is jointly liable so if the retailer goes bust, you can claim a refund from your credit card issuer (this protection applies to purchases valued between £100 and £30,000). However, purchases made using a credit card cheque are not covered by this clause.

Don’t use your card for dual purposes

Most card providers use a payment hierarchy where the cheapest debt is paid off first. Therefore you should only use your card for one purpose unless the same rate is charged for both balance transfers and purchases.

Where many consumers slip up is by taking out a card with a much shorter 0% offer on purchases than balance transfers (or vice versa) and then assuming it’s OK to keep spending. For example, the Virgin Credit Card, which offers 16 months at 0% on balance transfers, also offers three months 0% on purchases. However, you’ll start accruing interest on your purchases as soon as that three-month offer ends and won’t be able to pay that back until the balance you transferred is paid off in full. So if you want to keep spending while continuing to pay an existing debt you’ll need a card with an equal 0% period on purchases and transfers.

Don’t exceed your credit limit

You will be given a credit limit when your application for a credit card is accepted – this is effectively a spending cap. It is important to monitor what you owe on you card because if you exceed the credit limit, not only will your account be blocked but you will also be charged a penalty fee, typically in the region of £12.

If you feel your credit limit is too low you can usually apply to have it changed once you have held a card for six months.

Don’t miss a payment

Failure to make at least the minimum monthly payment will see you hit with a late/missed payment charge, usually of around £12. In some cases use of your credit card may even be suspended and any late payments will show up on your credit profile which can harm your chances of gaining credit in the future. So make sure you pay at least the minimum each month.

Now that you know your dos and don’ts there is one more golden rule to remember before you apply for a credit card – one size does not fit all. Different credit cards serve different purposes and to properly play your plastic you need the right tool for the right job. Here are our picks of the top credit cards for different users:

• Best card for spending:

The Halifax All in One Card offers 0% for nine months on both purchases and balance transfers with a typical rate of 15.9% and a 3% balance transfer fee.

• Best card for balance transfers:

The Virgin Credit Card has a 0% introductory rate on balance transfers for 16 months with a 2.98% balance transfer fee and a typical rate of 16.6%.

• Best card for cashback:

If you can pay off your credit card balance in full each month then consider the American Express Platinum Cashback Card with 5% cashback for the first three months on spending up to £2,000 and up to 1.5% thereafter.

• Best card for using abroad:

The Post Office Credit Card charges no loading fees on exchange rates no matter where you use it in the world and has a typical interest rate of 16.9%. For more information on what to look for when applying for a card for overseas use read our article “Easter travel money”.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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