Young and hard up? Get in control of your credit now!

The difficult economic backdrop has taken its toll on all of us, but young people aged 18 to 34 are some of the hardest hit.

Nearly one in five of this age bracket are relying more on credit this year, according to new MoneySupermarket research.

And more than one in 10 Britons in this age group have used a credit card cash withdrawal to make ends meet within the last 12 months.

This short-term financial fix is likely to cost them dear in the long run, though, as credit card withdrawals are one of the most expensive ways to get your hands on some extra cash.

Expensive credit to rely on

There are several reasons for this. Firstly, cash withdrawals are charged at a much higher rate of interest than standard purchases.

Recent figures show that, while the average credit card annual percentage rate (APR) is around 17.5%, a typical cash withdrawal is charged at more than 26%.

Even though most credit card companies offer up to 59 days of interest-free credit on purchases, cash withdrawals start to accrue interest from the date of the transaction, rather than the next payment date.

And to add insult to injury, you are also likely to pay a cash-withdrawal fee of at least £3 and up to 3% of the amount you withdraw.

Kevin Mountford, head of banking at MoneySupermarket, said: "It's worrying that such a large number of young people have been tempted to use a credit card for cash withdrawals as the charges and fees for doing so can be sky high.”

That does not mean that you should avoid credit cards altogether, though.

Used properly, they offer a range of benefits such as cashback and reward points – all at no cost to you if you pay them off in full each month.

Kevin Mountford said: “Using a credit card for everyday expenditure but then paying it off in full at the end of the month does not cost a penny, and can come with added benefits.”

For larger purchases worth between £100 and £30,000, using a credit card also has the advantage of offering added protection under Section 75 of the Consumer Credit Act.

It states that credit card providers (but not debit card providers) are jointly and severally liable with retailers if you end up out of pocket as a result of a transaction.

Should the company go bust before the item is delivered, or it is damaged or lost, you can therefore apply to your card issuer for a refund.

The more recently-introduced Consumer Credit Directive tops up this protection to £60,260 for the same eventualities.

Getting and using a credit card responsibly will also help build up your credit score which will help when applying for other borrowing, such as a mortgage, in the future.

Here, we investigate the different types of credit cards available and explain which is right for your individual needs.

Building up your credit rating

If you have never taken out any form of borrowing, your credit score – on which the success of your application is based – will not be very healthy.

In this case, you may need to take a less competitive credit card for a while, until you qualify for better deals.

The Aqua Reward card is a good start as it falls into the credit builder camp but unusually, also offers 3% cashback a year (to a maximum of £100). The downside though is that it comes with a representative annual percentage rate (APR) of 34.9% (variable) so you will be have to be absolutely sure you can clear the balance every month. This is also the best way to help your credit rating.

Capital One’s Classic Extra card also comes with a representative APR of 34.9% (variable) and you can earn a £10 annual bonus.

In both cases however, to get anything back you will need to make payments on time and keep within your agreed credit limit.

0% purchase cards

For cash-strapped young people, a card offering 0% interest on purchases for an introductory period is a great way to make large purchases without breaking the bank or even tapping into your savings.

And the good news is that there are some very generous deals around.

You can, for example, pay 0% on purchases for a massive 16 months with the Tesco Clubcard Credit Card.

However, you will need to be disciplined about repaying the debt while the 0% period still applies because the standard representative APR is a hefty 16.9% (variable).

The Halifax All-In-One card, meanwhile, offers 15 months at 0% on both purchases and balance transfers (subject to 1.93% balance transfer fee) and has a representative APR of 17.9% (variable).

You will already need to have built up a good credit score for both deals however.

Reward cards

Using a reward credit card to do your shopping, and then paying it off in full at the end of the month, is one way to get more from your spending.

The Tesco Clubcard Credit Card described above, for example, is a good option for anyone who likes to do their grocery shopping at Tesco stores.

This is because the card not only doubles up as a Clubcard in-store with accelerated points-earning, it also allows you to earn Clubcard points on purchases made elsewhere at a rate of one point for every £4 spent.

If you enjoy travelling, it is also worth checking out the Virgin Atlantic White Card, which offers 3,000 free air miles when you make your first purchase (within 90 days of opening the account) plus one mile for every £1 or £2 spent thereafter.

Again, you’ll need to avoid the representative APR of 17.9% (variable), which is why cards of this kind are only suitable for those who can afford to pay them off every month.

Cashback cards

Many people prefer earning cashback to rewards. And if being paid for spending sounds good, a cashback card is probably for you.

The American Express Platinum Cashback card, for example, pays 5% cashback on spending of up to £2,000 in the first three months.

Alternatively, Santander’s 123 Credit Card now offers up to 3% on spending on fuel, National Rail and Transport for London fares, 2% on department store purchases and 1% on supermarket shops.

And, as previously mentioned, for people with poor or non-existent credit scores, meanwhile, there is also the Aqua Reward card, which pays cashback at a rate of 3%.

As with reward cards, however, you must pay these cards off in full each and every month to benefit.

The representative APR on the Amex card is 18.5% (variable), while Santander’s is set at 18.9% (variable) and Aqua charges a massive 34.9% (variable).

Balance transfer cards

There is no point paying interest on your debts if you can avoid it.

If you are paying off a credit card or overdraft, switching the debt to a 0% balance transfer card is therefore a no brainer.

You can currently pay 0% for up to an incredible 23 months with a Barclaycard Platinum Credit Card with Extended Balance Transfer (subject to a 2.8% fee).

Any benefit will quickly be wiped out if you fail to clear the debt within the interest-free period, though, as the representative APR is 17.9% (variable).

Tesco also has a Clubcard Credit Card for balance transfers offering 22 months at 0% (subject to a 2.9% fee), after which it charges 16.9% (variable).

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct. We're free, independent and compare all UK credit cards, as well as offering exclusive deals you can't get anywhere else. Contact at Moneysupermarket House, St David's Park, Ewloe, Flintshire, CH5 3UZ. © Ltd 2012.

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