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Credit cards can be incredibly useful tools, but only if you choose one that suits the way you spend. And if you don’t pay them off in full, or use the wrong card for your needs, you can end up paying a fortune in interest charges.
From 0% deals to travel perks and cashback, here’s a simple guide to help you cut costs, avoid traps and get the most value from your plastic.
If they are used wisely, credit cards have benefits. They are more popular with over-65s than any other age group, with nearly four out of five (78%) of over-65s having one in their wallet, according to figures published by Moneysupermarket.com.
Using a 0% credit card lets you spread the cost of major expenses, like a new sofa or holiday, while keeping your savings earning interest.
Other cards will reward you with cashback on your day-to-day spending or pay loyalty points.
They can also be a safe way to spend, as credit cards provide coverage for your purchase (if the item is over £100) through Section 75 protection.
In some cases they can even help your credit score by showing that you can manage credit responsibly – as long as you pay your bill on time each month.
Some people find that credit cards tempt them to make purchases that they wouldn’t have done otherwise.
High interest rates mean your debt can quickly grow, especially if you only make the minimum payment each month. If you miss a payment, it could damage your credit rating.
According to Moneyfacts, the cost of borrowing on a credit card now stands at a 20-year high, with the APR on the average card 35.8%. The average credit card debt held by over-50s is £3,922. Across a year, that could mean a huge £1,404 in interest charges.
And according to UK Finance, nearly half (47.8%) of outstanding balances have interest being charged on them.
While it might feel convenient to have one credit card that you use for everything, it can make sense to have different cards for different uses. For example one that pays cashback, which you use for day-to-day spending, and another that’s best for foreign spending, which you use for holidays. You might have another card for a balance transfer or big purchases.
Having more than one can also be helpful if you mislay your card or if it gets unexpectedly declined.
If you do have multiple cards, it’s important to stay on top of them all and pay the bill every month. Setting up direct debits will save you having to remember.
The secret to using a credit card is to understand how and when you plan to use it.
Alastair Douglas, CEO of Totally Money, says: “Choosing the right card is key. Ask yourself why you’re applying for the card. Is it to reduce your debt, in which case you should be looking for a balance transfer? Or is it to buy something and spread or delay the payment, which is when a 0% purchase card should come in handy.”
If you’re one of the 29% of over-50s with credit card debt, clearing that debt should be a priority. If you’re approaching retirement, bear in mind your income is likely to drop, so it makes sense to clear the debt before you retire, if you can. Debt can eat into your income, and many credit cards charge high rates of interest.
A 0% balance transfer card could give you time to pay down your debt, without interest charges adding to it further (although there may still be fees).
Andrew Hagger, a personal finance expert at Money Comms, says: “You could switch your balance to a new card and pay no interest for up to two and a half years [depending on the offers available at the time] – this would help you clear your existing card debt more quickly.”
Most balance transfer credit cards charge a 3%-4% transfer fee, but some are fee-free. Bear in mind that cards with longer 0% periods are more likely to have fees attached. So go for the lowest fee that has a long enough 0% period for you to be able to repay the debt.
Plan to pay off your balance within the 0% period to avoid high interest rates once the deal ends.
Only use a balance transfer card to pay down debt. Avoid spending on the card unless it also offers interest-free purchases (most don’t).
For everyday spending, consider a separate card with cashback or rewards (as long as you can pay the balance in full every month).
These cards let you spread the cost of large purchases over several months (as much as two years in some cases) without incurring any interest. “If you’ve got a major purchase coming up and would rather not dig into your savings, you could consider a credit card offering zero interest on purchases,” says Hagger.
“If you repay your minimum balance each month and clear it before the 0% introductory rate ends you won’t pay a penny in interest.”
Like other credit cards, you’ll benefit from the extra security of Section 75 protection (up to a maximum of £30,000).
As with any interest-free credit card, it’s important to clear the balance before the 0% period ends to avoid high interest rates. If you can’t manage that, consider transferring it to a balance transfer card, if you can, but watch out for fees.
Reward credit cards can add value to everyday spending by offering perks such as cashback, loyalty points, or travel rewards, such as air miles.
These cards can be a good deal for people who always clear their balance each month (which is generally recommended as the best way to avoid credit card charges).
Before you choose, look at the rewards closely and check that they match your lifestyle and spending habits. There’s no point building up a vast number of loyalty points (which you can usually exchange for discounts or vouchers) if you’re unlikely to spend them. If that’s the case, regular cashback might suit you better.
Cashback cards typically offer a flat percentage on most or all purchases (which is usually capped at a maximum amount).
Some cards (including some that are not dedicated reward cards and even some debit cards) also offer more generous cashback with specific retailers. These offers tend to change regularly, and you usually have to opt in to the specific deal in order to get the enhanced cashback.
Remember that if you don’t consistently clear your balance each month, interest charges will quickly wipe out the value of the cashback or benefits. Watch for fees as well.
If you like to go abroad on holiday, a travel credit card can help you save on overseas spending by offering favourable exchange rates (typically better than you’d get if you buy foreign currency at an exchange bureau) and waiving foreign transaction fees.
It’s important to choose the right credit card for this. Hagger explains: “If you travel overseas and use your everyday credit card, it’s highly likely that you’ll be charged around 2.75% to 2.99% extra on each purchase transaction or cash withdrawal made whilst you’re outside the UK. So, every payment of £100 could end up costing you an extra £2.75 [or more] on top.”
,By signing up for a credit card that doesn’t charge these additional fees when you’re abroad, you’ll save yourself a good bit of your holiday budget which you can spend on far more enjoyable things.”
If you prefer a no-fuss, all-purpose card, and you don’t always pay off your balance, a low-rate credit card may suit you. These cards offer a long-term low-interest rate on purchases, balance transfers, and sometimes even on foreign transactions.
A ‘low’ rate is typically considered less than 13%, compared to an average APR of 35.8%.
A low-rate credit card might suit someone who wants one credit card for all their needs. But they are the jack of all trades, master of none. You’ll likely end up paying more than you would if you took out several specialist cards. And even a low-rate card is unlikely to be the cheapest way you can borrow.
There are lots of credit cards with no special features, often offered or even issued automatically by your bank or building society.
While these are easy to get, they tend not to offer any rewards or promotional offers and you’ll likely pay more to borrow.
If you clear your balance each month, a rewards or cashback card may better suit your spending habits. For those with outstanding debt, a balance transfer card is usually a smarter option.
In short, standard credit cards rarely offer the best value, so if you’re using one of these, you’re probably missing out.
Once you’ve worked out what sort of credit card you need, it’s easy to search for the best buys on comparison websites.
These sites will often perform a ‘soft’ search, which doesn’t affect your credit score. This helps identify cards you’re likely to be approved for and reduces the risk of rejection, which could harm your credit score.
Rejection isn’t always due to bad debt history. It may be because you haven’t borrowed enough to build up much credit history, or your income may not the provider’s criteria.
Once you’ve got the information that you’re likely to be eligible, then you can go ahead and apply, if it’s the right card for you.
Provided by HUB Financial Solutions Limited
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