5 things to consider when choosing a credit card
Cashback, 0% interest, “no fees”, “representative interest”… What do you need to pay attention to when you’re comparing credit card offers?
Changing your credit card is like taking out a new mobile phone contract. Before you start looking at all the shiny new offers it’s useful to look at your current usage pattern.
When you’re making purchases, as of 13 January 2018 you can’t be charged extra for using a credit or debit card. If you’re charged more, complain to the trader and ask for the charge to be refunded.
(You can still be charged extra if the seller’s bank is outside the European Economic Area (EEA), for example Switzerland or Turkey.)
Do you use your credit card for lots of small purchases or a few big-ticket items? Are you careful to pay off the total balance each month, do you jog along around the middle of your credit limit, or regularly knock up against the top of your credit limit?
If you add up the additional charges you’ve paid on your current card this year you’ll get a good idea of the cost features that will be most important to you.
What to compare
The annual percentage rate (APR) is an overall cost of the credit card interest rate after any special rate (“0% interest”) deal ends.
But you also need to look at each card’s interest rates for:
- cash advances
- balance transfers
Will you actually get the “representative APR”?
Credit card advertising will quote a “representative APR”- which is a rate that at least 51% of people will be offered.
Whether it’s the rate you’ll be offered could depend on your credit history. Ask for a quote from the card provider before you apply (to prevent a negative rating being added to your score).
Check the comparative cost of credit cards with the credit card cost calculator operated by the Money Advice Service (free and impartial money advice set up by government).
The interest rate isn’t all you’ll pay for on a credit card. Look for the:
- Annual fees
- Balance transfer fees (which could be 3% of the amount transferred from your old card: £30 on a £1,000 transfer)
- Charges for late payments
- Fees for exceeding your credit limit
- Fees for returned payments
- Charges for using your card abroad
Fees and interest on some 0% transfer credit cards can add up to more than £490.
3 minimum payment amount
A 0% introductory deal doesn’t mean you’ll be paying nothing each month.
Check the minimum payment required each month – and how much the penalties are if you miss it. If you don’t pay the minimum amount every month you will probably lose the 0% special rate and revert to the standard interest rate.
4 Limits to 0% interest deals
- How long does the interest holiday last?
- How much is the transfer fee?
- Is there a maximum amount you’re allowed to transfer from your old card? (Usually about 93% of the credit limit on your new card – to allow for future transactions on the account.)
- Does the introductory 0% interest apply to both balance transfers and new purchases, for the same number of months? And how does that suit your spending patterns?
If you know you’ll be able to pay off any new purchases fairly quickly, but clearing the balance on your transferred credit card balance is going to be more difficult, you should go for the card with the longest introductory rate.
How to win on 0% offers
To really be winning on a credit card deal, you want to aim to pay off your total transferred balance within the 0% interest period. You can do that either by dividing the total amount you owe into the number of months the introductory rate lasts for, and set up a standing order to pay off that amount each month.
Or if you’re a really diligent money-manager, you could pay that monthly amount into a higher-interest savings account, just pay off the minimum on your card each month and then transfer your savings account balance to pay the total on your credit card in the last month before it’s due.
5 Rewards and benefits
- Air miles
- Free travel insurance
- Points on supermarket shopping
- “Concierge service” for bookings or food deliveries
To avoid being dazzled by welcome benefits, compare the value of them with how much you paid for this service last year. And only consider their value if you’re going to be paying off your complete balance every month after the introductory period: otherwise your interest payments will soon outweigh the value of the rewards.