With high interest rates, low minimum repayments and indefinite repayment terms, credit cards can be a hugely expensive way to spend. However, once you’ve learned the tricks and how to play them, credit cards can also provide you with a very cheap and efficient means of borrowing over the short term; we explain how to make them work for you....
Borrow on your credit card for free
While it is advisable to live within your means and only borrow what you can afford to pay back, sometimes it is necessary to make a large purchase or an unexpected payment that you had not budgeted for.
The most cost effective way to borrow money under these circumstances is often on a credit card that offers an introductory offer on purchases. Many credit cards are now offering lengthily interest free purchase periods and spending on this type of card enables you to spread the cost over a number of months interest free. Click here to compare the latest offerings.
For instance, if you spend an average of £5,000 on a regular credit card each year at a rate of say, 16.9% and only make the minium repayments each month you’ll end up paying over £270 a year in interest. However, if you spend on a 0% purchase card you’ll pay absolutely nothing.
While this sounds like a fantastic opportunity to borrow money for nothing you do need to make sure that you meet the minimum repayments on time throughout the interest free term. If you default or make late payments it’s possible that the 0% offer will become invalid and you’ll be charged a heft rate of interest on the whole amount making your purchases much more expensive than you ever intended.
Ideally, when spending on 0% purchase cards you should try to pay back more than the minimum amount each month so that the debt is cleared completely by the time the offer expires. That is unless you know that you can make full payment of the balance at the end of the introductory period in which case you should keep this amount in a savings account and continue meeting minimum repayments until then. However, if you haven’t been able to clear the balance you’ll need to look into transferring your outstanding to a 0% balance transfer card. Click here to compare 0% balance transfer cards.
Say goodbye to interest repayments
If you're currently carrying outstanding balances on your credit cards your focus should be on reducing the amount of interest you pay. This is important as the higher the APR charged on your borrowing, the more you'll have to pay back. By transferring your interest-accumulating balances to a card that offers an extended 0% period on balance transfers you will be given the opportunity to repay your credit cards interest free.
During a 0% transfer period your balance is fixed and no additional interest is accumulated, this means that every penny you repay is put towards clearing your debt. So, by paying back as much as possible each month (rather than just the minimum as this will make it very difficult to clear what you owe) you should be able to pay off your credit cards in a much shorter time and with much less expense than was previously be possible.
For example, you could save over £500 a year in interest on a £5,000* credit card balance simply by switching from a card that charges a standard rate of 15.9% apr, to one which offers a 12 month 0% balance transfer offer. That’s 10% worth of your balance saved in one simple step!
To make a balance transfer really worth your while you should go for the card that offers the longest interest free period possible. This will provide you with the best opportunity to clear your credit cards without accumulating a penny more in interest payments.
However, it is essential that you make a note of the date this introductory offer expires as if you have been unable to pay off your card balance completely by this time you’ll need to transfer to another 0% card so that your debt continues to remain interest free. We offer a free reminder service that helps you make the most of 0% deals by notifying you when it’s time to switch. Visit http://www.money.co.uk/services/reminder-service.htm for more information.
It is likely that there will be a fee charged when you transfer your existing balances to a 0% card. This tends to be around 2-3% percent of the amount transferred and you will need to take this into consideration when comparing different cards.
Ideally you should go for the credit card that offers a combination of the longest interest free offer on balance transfers and the lowest balance transfer fee possible. Best buy tables are a good place to start your search as they allow you to compare offers and fees at a glance making finding the right card completely hassle free.
Realistically, if you don't think you'll be able to clear the balances you’re currently carrying on your cards completely within any of the 0% periods offered there is another option that may be more suitable.
A number of providers are now offering ‘life of balance’ transfer cards. These don’t offer interest free periods but instead guarantee you a low rate on your balances until you’ve cleared them completely. They’re often fee free too which is an extra bonus.
A word of warning though, never, ever, ever make new purchases on a balance transfer card as these will accumulate interest, putting you back where you started and growing your debt rather than reducing it. This happens because your credit card company will assign most of the repayments you make to the portion of your debt that isn’t profitable for them (i.e. the interest free balances transferred), leaving your new purchase amount to sit and accrue interest at the standard rate (usually around 16.9%) for as long as possible.
Instead, if you have a decent credit history it can be a good idea to have two cards, one which you use solely for interest free balance transfers and another that you use for new purchases.
Make money for nothing
If you manage to pay off your credit cards in full each month and are free from existing debt, taking advantage of the opportunity to actually make money from your credit cards will definitely be worth your while. Cashback credit cards provide the solution and could earn you up to £50** a year for nothing.
This type of card actually credits you with a certain percentage of your spend each time you use it to make a purchase. For this reason your focus should be on finding the card that gives you the best cashback rate. Best buy tables are the simplest way to do this as they will detail standard cashback amounts along with any bonus offers so that you can find the most profitable card at a glance. Visit http://www.money.co.uk/credit-cards/cashback-credit-cards.htm to compare the latest cashback offers.
While the amounts offered by cashback cards aren’t huge (usually around 1%), over the course of the year they can really add up; this is especially true if you time your spending correctly. For instance, most specially designed cashback cards offer an introductory bonus in the form of a higher cashback rate valid for your first few months of spending. By timing your card application just before you need to make a big purchase (i.e. just before you start your Christmas shopping or book an expensive holiday) you’ll be able to benefit from this and get as much cash back as possible.
The best way to take advantage of cashback offered by your credit card provider is by making regular purchases such as groceries and petrol on your card and paying off the full balance each month. This way you’re not only getting cash back, you’re also given the opportunity to earn an extra 50 or so days of interest on cash is sitting in your (high interest!) current account.
While cashback provides you with a great opportunity to earn money from your purchases it isn’t the only reward available with credit cards, some offer the opportunity to earn airmiles, accumulate loyalty points or even give to charity as you spend. However, despite the obvious benefits of spending on this type of card you should only use a ‘reward’ card to make purchases if you are able to clear your credit card balance in full each month, otherwise you could end up paying out much more in interest repayments than you’re earning back.
Spend carefully
Whether you have existing debts, are looking for cheap borrowing or would just like a little extra back, when used 'carefully' credit cards do provide an incredibly economical and flexible financial solution. By putting the above tips into action you should be able to clear your credit card debts quickly, borrow money interest free and even make a little back for yourself, saving you up to £900 a year!
*Based on an annual spend of £5000 and switching from a card charging 16.9% to one which charges 0% on purchases. This saves £278.17 in interest payments a year.
**Based on a credit card balance of £5000, repayments of £150 a month and switching from a card charging 16.9% to one which charges 0%. This saves £578.82 in interest payments a year.
