A credit card may be one of the most popular borrowing options, but it’s definitely not a case of “pick a card, any card”. There are real differences between what the various types offer, how they are best used and how much they charge you
There are several types of credit cards, from student to cashback options, and each has a specific purpose. If you get the right credit card it’s likely to work for you; if you don’t, it won’t. It’s as simple as that – so it makes sense to take time to discover which credit card is best for you.
For a small slither or plastic, a credit card packs a lot of punch. Highlights include:
It’s almost universally accepted
Payments of £100 to £30,000 are protected under Section 75 of the Consumer Credit Act
It can provide interest-free credit, and benefits such as a cashback scheme or supermarket vouchers
It can be a sensible way to reduce some debts incurred in other ways, such as through an unsecured loan or overdraft, which could attract crippling levels of interest
It can help you improve your credit rating if used responsibly
You need to start by finding the right type of card for you, then you can shop around for the best deal. Here’s a run through of the options:
A 0% purchase credit card is a bit like a loan insofar as it gives you access to an agreed level of credit. The difference is your card won’t attract interest during its fixed 0% offer term. The length of time that the offer is available for can stretch from nine to 29 months.
This makes 0% purchase cards ideal for making big ticket purchases, such as a holiday, car or bathroom suite, as long as you have enough time to clear your balance.
Given the lender is shouldering a fair degree of risk, you’ll need to have a good credit score to be eligible for a 0% purchase card and have a predetermined minimum guaranteed income.
The biggest advantage of a 0% credit card is that you have access to cash for a long enough spell to clear what you owe before you start incurring interest (the annual percentage rate or APR).
The downside is that anything you still owe at the end of your term will attract a relatively high rate of interest, typically of more than 20%.
Also, you must ensure you make the minimum monthly repayments. Otherwise, you could lose the 0% rate and start paying interest and fees.
With a balance transfer card you can move debt from other credit and store cards to a new card that comes with a lower rate of interest for a set period. Often this can be as low as 0%.
There’s usually a fee of around 1% to 4% of the amount you want to transfer, but if this, plus the new interest rate, works out lower than what you’d be paying if you didn’t switch, it’s worth considering.
Fee-free cards are available too – but these tend to have shorter 0% periods.
Balance transfer cards typically come with a 0% rate for a fixed period, in much the same way as a 0% purchase card. This a big plus, providing you can make the monthly repayments required to clear your debt before the end of the 0% term.
If you can’t keep up the repayments, you could be back to square one, unless you can move your remaining credit to a new balance transfer card on similar terms. This isn’t ideal, however, so do the maths to ensure it’s feasible.
For instance, if you need to transfer £10,000, and can afford to repay £500 a month, you’ll need a card that comes with a 0% term of at least 20 months. This doesn’t give you much leeway so, if possible, opt for one that’ll give you some breathing space if you need to make a smaller repayment one month.
You also need to watch out for the fees. These are charged on the initial balance you transfer and are typically added to your debt. That means, in effect, you’re paying twice the interest as you would with a standard loan. That’s because loans only charge you interest on your remaining balance, which you pay off over time.
Credit cards are usually intended to buy goods and services, but are rarely attractive for cash withdrawals. There is an option for people who need to get their hands on cash, however: money transfer credit cards.
A money transfer credit card allows you to move money from the card’s balance to your bank account. Providing you get a card with a decent 0% interest period, this option can provide a cost-effective way to clear debt, such as an overdraft.
However, fees on these are high – typically around 4% – so it’s worth seeing if a more traditional loan might work out cheaper in terms of total costs.
Money transfer credit cards work in much the same way as a balance transfer card, with the main difference being where the money on the card goes. In this case, it’s to a bank account rather than another card.
As with a balance transfer card you’ll pay a fee, which is between 1% and 4% of the amount transferred. You’ll need to meet the minimum repayment terms, and be aware that the interest rate will jump up at the end of the 0% term. Likewise, the APR will be much higher if you use this type of card to make purchases.
Instead of benefiting from a long-term 0% interest rate, reward credit cards offer incentives that are activated when you spend on the card. Benefits include cashback on purchases, hotel vouchers, air miles or Nectar points. However, they often come with strings attached, such as annual charges and high interest rates.
While being able to earn enough points or cashback for a weekend away is great in theory, there are some things to bear in mind.
In some cases, the reward return rate falls after a certain point – either following a given number of months or once a set amount has been spent on the card. Additionally, if you fail to clear your balance each month, the cost in interest can quickly outweigh the value of the reward.
Not everyone is eligible for a 0% credit card. This may be because they don’t have much of a credit history or are low earners. The alternative in this case is a low-interest credit card, which typically has an interest rate of up to around 8% APR. Cards charging more than that are considered to be standard rate credit cards.
Low-rate credit cards are best for people who don’t intend to make use of the cards often and when they do, keep their spending low.
This may be for a short spell in the days leading up to payday, when money is tight. Providing you regularly pay more than the minimum monthly repayments, clearing what you owe as soon as possible, the interest charged is likely to be manageable.
Low-rate credit cards are fine if you only draw on them rarely, and then only for a short period and for small amounts, such as the weekly shop or topping up at the petrol station.
They may even be worth considering if you can get a 0% purchase card, particularly if you’re concerned that you’ll forget to switch before the zero-rate term ends (or you just don’t fancy searching for a new card).
Used well, low-interest credit cards won’t impact your credit rating. The biggest disadvantage with any interest-charging card is that the advertised APR is representative, not set in stone. Your credit history can affect the interest rate you’re offered, meaning the rate may be higher than the one advertised.
A credit building credit card is designed for people with a poor credit history, county court judgments or have been declared bankrupt and have other obstacles that would make conventional lenders think twice about extending a line of credit. It can also help those with no credit history.
These typically have a relatively low maximum credit limit, for example starting at £100. This limit rises if you prove you can manage your finances and don’t miss your full monthly repayments.
After time, the effect of good money management will have a positive impact on your credit score making it easier to be accepted for secured and unsecured loans as well as better credit cards with lower APRs.
There are two huge benefits to having a credit building credit card. First, it’s relatively easy to be accepted for one, and they can be cheaper to use and repay than other forms of debt, such as a loan.
Second, they help you improve your credit score, making it easier to get more credit in due course, including other types of loans, such as mortgages.
You must not spend more than you can guarantee you’ll be able to pay back each month. Otherwise, the disadvantages of having this type of card will kick in.
On the downside, the amount of credit made available will be low, while the interest rates are relatively high, typically around the 35% to 40% mark. This is because you’re considered a risk, and more likely to default on repayments.
Student credit cards are similar to credit building cards, as they tend to cater for the needs of young people with no credit history. As such they feature relatively high APRs and have lower maximum credit limits, often starting at around £100 and rising over time to around £1,500.
If used correctly, student credit card holders will not only benefit from a gradual increase in their credit limit, but can also build up their credit score. Section 75 protection on purchases of £100 or more is another bonus.
The major downside is that due to the high APR, these cards can seriously drain finances, unless the balance is paid off each month.
Travel credit cards are specifically intended for use abroad. Unlike standard alternatives, these credit cards usually don’t charge a fee for foreign transactions. They are also free of interest for a fixed term, which could be anything from three to nine months.
After this period, the interest rate reverts to a higher rate. So never presume that the travel credit card you use for this trip will offer the same benefits for the next one. Your 0% foreign transaction fee may suddenly come with higher charges when making purchases abroad.
No credit card is ideal for making ATM withdrawals. While a travel credit card will give you a better exchange rate, the typical 3% fee per transaction is comparable with standard credit cards.
Aside from the benefits already mentioned, travel credit cards are far safer to carry around than huge sums of cash, and more convenient than queuing at a bank while on holiday to cash in travellers’ cheques.
The downside comes if you forget to pack them away with your passport upon returning home and use them like you would any other card. This is because they typically come with high interest rates for domestic use.
If you’re running a small business or you’re a sole trader, you could take out a business credit card. These operate in much the same way as other cards, but come with some additional benefits. Your credit level will depend on the strength of your business. If it’s healthy, you could get an attractively low APR and a high level of credit.
Keeping your personal and business spending separate has distinct advantages, helping with cashflow budgeting and tax returns. Also, some cards come with benefits including cashback, itemised statements (so you can see where the money is going), additional cards for other staff and insurance against employee mis-use.
On the flipside, you’re unlikely to get a business credit card unless you have a good credit history. Also, these cards often come with an annual fee of from £30 to £100.