If you’re going to find the very best credit card for your circumstances, you need to know how credit cards work.
Most people understand the basics: credit cards allow you to borrow money up to a pre-set limit, repay some or all of the debt, and then borrow the money again (and again). Easy, right?
But there’s loads of other stuff you need to get your head around too. What’s an APR? How do introductory offers work? Do I need a purchase card or a balance transfer card? What makes a hot deal?
In most cases, hot credit card deals tend to be the ones offering 0% interest for a set period of time. This will either be for balance transfers or purchases, occasionally both.
Credit cards compete with one another by offering longer and longer 0% deals. You’ll quite often see a hot deal at, say, 30 months, being taken over by a new deal offering 31 or 32 months.
Other things that might make a credit card deal hot are:
• Freebies or perks (i.e. travel insurance)
• Fee-free use abroad
• Cashback (either on taking out a card or as a percentage of spending on it)
• Reward or loyalty points
But with every hot deal it’s vital to understand how your credit card works and stick to some simple rules. Introductory offers
A card with a 0% introductory offer on balance transfers is known as a 0% balance transfer card
. You’ll still be charged interest on purchases if you spend on a balance transfer card.
A card with a 0% introductory offer on purchases is known as a 0% purchase card
. You’ll be charged interest if you transfer an existing debt to a purchase card.
Some cards will have a 0% introductory offer on both balance transfers and purchases. But the 0% periods won’t necessarily be the same length. These are often referred to as ‘dual’ credit cards
. Balance transfer cards
A balance transfer allows you to transfer a debt owed on one credit card to another credit card. Why would you do that? Because the new card charges 0% interest for X number of months, that’s why.
0% balance transfer cards are good for people who are paying high amounts of interests on existing credit card debts and want to reduce the rate to zero. A 0% interest rate allows you to pay off debts quicker zero if you make payments at the same rate.
What’s the catch? Firstly, 0% balance transfer cards will only be offered to people with decent credit ratings. Secondly, you’ll normally still be charged interest on purchases on a 0% balance transfer card – so you’ll need to stop spending. Thirdly, it’s tempting to let a 0% card mean you ignore your debt so don’t – it still needs to be repaid.
And fourthly, balance transfer fees.Balance transfer fees
There’s no such thing as a free lunch and the sting in the tale with balance transfer cards is that there’s normally a fee involved: the balance transfer fee or ‘BT fee’. This will be expressed as a percentage of the amount transferred: i.e. a deal might say ‘BT fee 3%’.
In this case, transferring £1,000 of debt would cost £30 and your new balance would be £1,030.
When working out whether it’s worth switching an existing debt to a new credit card do the sums; it’s only worth switching if the amount you save in interest payments is more than the fee you pay.Purchase credit cards
A purchase credit card will have a competitive rate for purchases, usually 0% for an introductory period. This can be anything from a couple of months to two or three years. After that interest will be charged at the card’s APR.
0% purchase cards allow you to buy items and spread the cost without paying any interest for the length of the introductory period.
To make the most of a hot 0% purchase card, you should aim to pay off the debt during the 0% period, before interest kicks in – that way, you’ll have borrowed money at zero cost. What’s not to like?Money transfer credit cards
Balance transfer cards only allow you to switch existing credit card debts to the new card. But ‘money transfer’
cards allow you to switch other debts too – such as overdrafts and loans.
Money transfer cards typically offer a 0% introductory offer and can be a great way to ditch an expensive overdraft and pay off the debt at 0% interest. But, as with balance transfer cards, there’s likely to be a fee involved (the ‘money transfer’ or MT fee) so you need to take this into account.WARNING
: If you transfer your overdraft to a money transfer card, don’t then run up your overdraft again. That’s just silly.APRs explained
APR stands for Annual Percentage Rate and is basically a charge for borrowing money. It is expressed as a percentage of the total amount borrowed and takes into account both the interest rate on the card and any annual fee or other charges. If there isn’t an annual fee, the APR basically represents the interest rate you’ll be charged.
When credit card providers advertise a typical APR, they’re obliged to give this rate to at least half of successful applicants.
Credit card APRs range from about 6% to 50%; the average card charges about 17 or 18%. Credit cards with high APRs are typically aimed at people with a poor credit history.
When it comes to credit cards with 0% introductory rates, APRs typically kick in at the end of the 0% period. You could either pay this rate or switch your credit card again.Credit limit
Your credit limit is the maximum amount you can owe on your card at any one time. If you try and spend on your card beyond your limit, the purchase may be declined or you could be charged extra.
Your credit limit will be set when you apply for your card and will depend on your circumstances, income, and the credit card you’re applying for. WARNING:
If you exceed your credit limit you may have to wave goodbye to any 0% introductory offer – to get 0% you need to stick to the rules.Minimum payment
The minimum payment is the lowest amount you’re required to repay on your credit card each month. It’s usually a percentage of the total amount owed or a monetary value. I.e. it might be 5% or £5. The minimum payment will be shown on your monthly statement.WARNING
: Even if you have a 0% balance transfer or purchase credit card you still need to make the monthly minimum payment. Missing a minimum payment can mean any 0% introductory deal is cancelled – and interest will kick in.
You might incur a late payment fee too, normally £12. And it might affect you credit record.
So, I can’t urge strongly enough, pay at least the minimum each month. You can set up a direct debit from your current account to do this.Annual fees
Some ‘premium’ credit cards come with an annual fee. This fee will apply no matter how much, or how little, you use the card.
Annual fees tend to apply to credit cards that require a minimum income level and you may get certain perks in return for the fee.
For a credit card with an annual fee to be a hot deal, it will need to offer pretty decent perks that people will make use of. Some premium cards offer access to airport lounges – great if you’re a frequent traveller, but not a useful perk if you never leave the UK. Make the most of interest-free days
Most credit cards offer 50 to 60 interest-free days on purchases. As long as you pay your balance in full before the end of this period, you won’t be charged interest on your purchases.
This means you can use your credit card for free if you pay the balance in full each month – you can set up a direct debit on your current account to do this.
It’s important to note that the interest-free period doesn’t usually apply to cash withdrawals.Cash withdrawals
Most credit cards allow you to withdraw cash from an ATM. But the interest rate you pay on cash is likely to be higher than the card’s standard APR so make sure you know what you’re doing.
Interest is normally charged from the day you withdraw the cash, rather than benefiting from 50 to 60 interest-free days. For this reason, you should only withdraw cash on your credit card in an emergency and aim to repay it in full as soon as possible. Cashback and rewards
Cashback credit cards are specialist cards which offer a proportion of the money spent on the card back in cash. For example, if you spent £200 on a card with a 1% cashback, you would receive £2 back.
Reward credit cards offer you loyalty points when you spend on the card. For example, Tesco Clubcard points or Avios.
There used to be tons of hot cashback deals on offer but credit card providers have reined them in a bit now. If you do find a decent cashback deal, make sure you repay the balance in full each month, otherwise the interest you pay is likely to dwarf any cashback you receive.Foreign exchange fees
When you use your credit card overseas you're likely to incur extra charges such as foreign loading fees, purchase or transaction fees and fees for using ATMs. These fees can add 4-5% to any transaction you make overseas and bump up the cost of your holiday.
Most credit cards charge these fees so any that don’t, such as Halifax’s Clarity card
, are likely to be hot deals – let us know if you spot one.Extra protection
As well as being a good way to spread the cost of buying things, using your credit card also gives you extra protection if things go wrong. Goods costing between £100 and £30,000 are guaranteed by the credit card company under Section 75 the Consumer Credit Act 1974.
You can use this act to get your money back if goods you’ve ordered don’t turn up, the seller breaches its contract or the retailer goes bust. For this reason, it can sometimes be a wise move to buy something on your credit card even if you don’t need to borrow the money – you can repay the debt straight away and benefit from Section 75 protection.Paying by credit card
Most new credit cards support contactless technology. This feature lets people pay for items, typically less than £30, by simply holding your card near a contactless reader.
For more expensive purchases you’ll need to enter a four-digit personal identification number (PIN).
You can also use your credit card to pay for things online or over the phone. The retailer will require the long card number on the front of your card, the expiry date and the three-digit CVV number on the back of your card.Credit cards and your credit rating
In general, the better your credit rating, the better credit card rate you’ll be offered. You can check your credit report with Experian, Equifax or CallCredit.
Don’t apply for lots of credit cards in a short space of time as this will make you look desperate, or possibly fraudulent, and damage your credit rating.
So, there you have it: The Hot UK Deals guide to credit cards. Any questions?