Time to play your cards right

If January is the month that many of us resolve to clear our credit card debts then perhaps February should be the month that we finally put those plans into action.

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According to research from Abbey, more than half of Britons used a credit card to pay for their Christmas purchases yet only 55% have actually cleared their festive debts and two thirds of those that haven’t are paying more interest than they need because they have failed to transfer their balance to a cheaper card. 

If you’re one of those looking to get your finances back on track then there’s no time like the present to switch your debt over to a card with a lower interest rate – or even a 0% deal. However, you must be careful which card you opt for as rates have been changing thick and fast in recent weeks.

Credit card shuffle

A number of providers including Capital One and Egg have written to some existing customers informing them that the interest they are charged on their credit card is rising. Capital One has also increased the rate on its fixed rate Platinum card from 8.5% to 9.9% - this rate is guaranteed until August 2012.

Other providers including HSBC, Royal Bank of Scotland and Natwest have started restricting the availability of credit cards to current account customers only.

However, not all credit card providers are tightening their criteria. Barclaycard has pledged not to increase the interest rates for existing customers for at least four months.

Barclaycard has also reduced the standard rates on its Platinum and OnePulse cards from 14.9% to 12.4%. This may sound like good news, but there is a catch: both cards offered a 14-month interest-free period on balance transfers. That has now been cut to 12 months and the fee charged to those moving a debt over from another card has been increased from 2.9% to 3%.

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So which card is right for you?

Don’t apply for just any credit card – they are not all the same and different cards suit different people. If you are unsure about which type to go for our article ‘How to choose a credit card’ should help.

For the majority with Christmas debts to pay off, the best solution – if you’ll qualify - is to move your existing balance over to a new card with a 0% introductory offer, allowing you a lengthy period to chip away at your debt without paying additional interest.

Although Barclaycard has reduced the length of its interest-free balance transfer offer, 12-months is still pretty good. It’s not the best deal, however.

The market-leading 0% balance transfer offer is the Virgin Credit Card at 16 months – this card carries a 2.98% balance transfer fee and a typical rate of 16.6%. However there are a cluster of credit cards offering 0% offers in excess of 12 months including the Egg Card which has recently extended its balance transfer period from March 1 2010 to April 1 2010. It carries a 3% balance transfer fee and a typical rate of 16.9%.

Remember that a 0% balance transfer card should only be used to pay off an existing debt and not for additional spending. While Virgin’s 0% deal lasts for 16 months on balance transfers, purchases are only interest free for three months. Once that period ends you will be charged the standard rate of 16.9% for the spending you have done.

Like most card providers, Virgin clears the cheapest debt first so you won’t start paying off your purchases until the transferred balance has been cleared.

If you need a card for spending on as well there is a way to avoid falling into this trap – you require a deal that offers an equal interest-free period on both transfers and purchases. In this regard the Halifax and Bank of Scotland All in One cards are the market leaders – both offer 0% periods on transfers and purchases for nine months with a 3% balance transfer fee and a typical rate of 15.9%.

With credit getting harder to come by, borrowers can no longer assume that they will be able to move their debt from one card to another once the interest-free offer ends. If you are looking to make a balance transfer but you don’t think you’ll be able to clear your debt during the 0% period, a low rate life of balance card may be worth considering. MBNA has just launched a new deal. Its Rate for Life Card offers a rate of 5.9% on balance transfers which applies until the debt has been repaid. There is a 1% transfer fee however.

Another option is Barclaycard Simplicity which has a higher standard rate of 6.8% but no balance transfer fee. The rate of 6.8% applies to purchases as well making it a good deal if you want a card for dual purposes – the MBNA card shouldn’t be used for spending as you’ll be charged a higher rate of 15.9%.

Remember however, that card providers check your credit rating when evaluating your application and many of the best deals are only available to those with spotless credit histories. You therefore need to apply carefully as a rejected application could further impair your credit score. Our Smart Search tool can help you identify which products you are most likely to qualify for.

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

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