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Choosing the Best Credit Card

Credit cards may seem like a simple way of borrowing money, but when deciding which credit card to take out there are a few things to consider. Careful consideration now, and a little research could save you hundreds of pounds in interest and fees.

The first thing to consider is how will you be using your card? It may be the case that you are planning to use your credit card simply as a way of making purchases rather than carrying cash. This means that you will be paying off your bill in full each month. In these circumstances it doesn’t really matter what interest rate you will have to pay. Perhaps the major considerations here will be what bonuses are available and the length of interest-free time you are given per month (see below). Bonuses can include cash back at the end of the year, air miles, shopping discounts or free insurance among a range of other perks. The only time you will need to consider the rate of interest is if you are withdrawing cash on your credit card, because interest is calculated from the time you withdraw the cash.

If like many people you are using your credit card as a form of borrowing money and will not be paying off your monthly balance in full, then it is worthwhile looking for a credit card with an introductory 0% rate on purchases. It is still worth checking the standard rate of interest as if you do not change your credit card when the introductory period ends, this is the rate at which interest will be charged.

Choosing the best credit card – balance transfers

If you have an existing balance on a credit card you may be able to transfer this to a 0% deal. This deal may apply for a certain amount of time or in some cases until the balance that was transferred is paid off in full. With many 0% deals on credit cards this rate will only apply to a balance being transferred from another credit card and not to any new spending. Therefore, if you are planning on making purchases on your credit card you should check what rate of interest is being charged. You should also check whether there is a fee for transferring your balance. These handling fees are normally about 2% of the total being transferred, with some providers capping this fee at £50 and some leaving the fee uncapped.

Choosing the best credit card - rewards

Some credit cards offer incentives such as cash back or loyalty points. These are in place to attract new customers and may seem like good deals. It is still wise to check the interest rates charged as the levels of cash back are relatively low and so may not balance out paying a higher interest rate. With rewards such as loyalty points it is not worthwhile paying more in interest if you are now going to redeem them and if their monetary value is low.

Some credit cards have interest free periods. This is the number of days allowed before you start being charged interest. A lot of credit cards come with 56 days’ interest free but others will start charging you interest from the day you make the transaction on your credit card.

Choosing the best credit card - repayments

The minimum monthly repayment on credit cards varies from between 2% and 5%.  If you pick a credit card with a low minimum monthly repayment, you should be aware that it could take you a long time to pay off your balance and cost you more in the process.

If you miss a monthly payment deadline then you can be penalised. Most credit card providers will charge you between £20 and £25, although if the OFT gets its way these are likely to be around £12. A good way of reducing the risk of a missed payment is to set up a direct debit for at least the minimum monthly payment amount. However, if there are not enough funds in the account for the direct debit to be paid you will still face the penalty fee.

Choosing the best credit card - cash

If you think you may need to withdraw cash on your credit card, you should check the interest rate charged. This will often be higher than the rate applied for purchases. It is also worthwhile checking if the provider charges a cash withdrawal fee.