How to win with a credit card
Five ways to avoid the high interest rate pitfalls, and beat the credit card lenders at their own game.
The casino always wins. But credit card providers don’t always have it their own way- if customers pay attention to the terms and conditions and game the system.
1 Repay the total balance every month
Credit cards are an extremely cheap way of having money to use – until you don’t pay off your complete balance. At which point they become a very expensive form of money: you’ll be paying upwards of 18 percent a year.
All your careful movements of this bit of money from here to there will go to waste if you’re not paying off the complete balance every month.
But of course that’s easier said than done, which is why you have a credit card in the first place. So how else can you make the system work for you?
2 Game the 0% balance transfer system
Beat the credit cards at their own game by transferring all your credit card debts to a card which won’t charge you any interest on your transferred balances – for anything up to two and a half years.
That’s no more interest payments disappearing out of your credit card account every month. On a transferred balance of £3,000 you’ll be saving £570 a year straight away.
You will pay a transfer fee: check how much that will be, and what all the other conditions are.
And you will need to be paying a minimum amount every month: get that set up on a failsafe direct debit.
You win on this system if you know what all the rules are, and staying within them. And then for the period of the interest-rate holiday you’ve got free money.
Your aim has to be to repay the total balance before the end of your free term – either in monthly instalments, or in a lump sum transferred from a savings account. Set up notifications for yourself a month before the period is due to end, so they don’t get to start charging you their high rate of interest – which is why they lured you over in the first place.
If you’re not going to be able to repay the whole balance before the end of the free period from the savings you’ve made… transfer it over to another 0% transfer card.
3 Do all your spending on a Cashback or Reward credit card
While your 0% transfer card sits in the background saving you interest on your debts, this is the card that could make you money on your spending.
Half a percent cashback on all your spending adds up over the year, thank you very much. If £1,000 of your monthly spending is cashback-eligible you’ll get £60 back a year.
But only if this was spending you were going to do anyway: at the retailers you would normally use, or which are the cheapest places to shop.
If you’re just being tempted to do additional spending (and is it possible that’s why retailers participate in these Rewards plans?) you won’t be making money. That £60 saving is quickly wiped out by one treat-yourself purchase.
To use a Rewards card or a Cashback card effectively you need to be forensic about your current spending patterns: where do you currently spend your money?
This is the credit card you will aim to repay completely every month – otherwise the interest rates of upwards of 20% will wipe out your monthly rewards.
4 Repay more than the minimum each month
It’s often easier said than done – but doing the sums can be a powerful incentive:
If you have a credit card balance of £2,000 at an APR of 17.99%, and you’re just making the minimum payments of around £30, it will take you more than 127 years to pay it off, at a cost of £19,728.82.
Paying £100 per month will clear the balance in two years – at a total cost to you of £2,321.08.
5 When you’re on holiday, pay in the local currency on your card
Usually, when you put your card into a foreign payment terminal you’ll get a message asking “Do you want to pay in pounds or euros?” (or Turkish lira, or US$…)
Pick the wrong one and you could pay nearly 8 percent more than you need to for your meal by the beach.
Your instinct may be to pay in sterling. But you’ll be paying a “dynamic currency conversion” rate for that transaction, and the average rate for that is a hefty 7.7 percent, according to the currency exchange FairFX.
But when currency conversions are being calculated on your monthly bill, most UK-issued credit and debit cards will apply a currency conversion fee of less than half that: about 3 percent.
Though you need to watch out for any transaction fees – which could be as high as £4.50 per transaction.