Play your credit cards right

Banks love issuing credit cards because they make a healthy profit from people who don’t understand how they work. In order to lure people in, they offer a range of incentives such as 0% interest and cashback. But with a little know-how, you can turn the tables and even make a profit on your credit card spending.

Use multiple cards

If you’re transferring a balance to a 0% credit card you can enjoy over a year’s worth of interest-free credit - one of the best deals is currently Virgin Money with 15 months. But many cards that offer attractive 0% balance transfer deals also offer a short period of 0% on purchases for, say, three months. Whatever you do, don’t spend on these cards!

When you make a repayment, the credit card provider will offset it against the part of your balance that attracts the lowest interest rate (i.e. the 0% balance transfer). This means any purchases you make will cost you interest, typically in the region of 15% to 20% a year, until you’ve paid off all the balance you’ve transferred.

There are two solutions. Either find a card which offers a long 0% deal on both balance transfers and purchases. These are quite rare so your best bet is usually to get a separate 0% purchase card and use this for any new spending while you are paying off your balance transfer. 

Never use cards for cash

Cash withdrawals using your credit card are usually hideously expensive. Firstly, the interest rates charged on cash withdrawals are far higher than for ordinary purchases. They are typically around 25% a year. Secondly, you also get hit with a transaction fee of 2.5% with a minimum of £2.50. So make a lot of small withdrawals and you’ll quickly rack up the charges. Lastly, you get charged interest from the day you withdraw the cash, unlike ordinary purchases where you get an interest free period of around 45 days.

Smart credit card users use cashback cards instead. These typically pay 0.5% on your spending but there are introductory deals, such as American Express which offers 3% cashback for the first three months. Take out these cards just before you tend to spend the most, when your car insurance is up for renewal or in the run-up to Christmas for example, to make the most of the introductory offer.

Most cashback cards don’t offer 0% deals as well. So only use them when you’re confident you can pay off your balance in full. If you’re not able to do so, the cost of just one month’s interest will normally be greater than any cashback you get.

Credit cards abroad

When you use your credit card abroad you’ll actually get a very good exchange rate, much better than a bureau de change or travellers’ cheques. However, credit card companies also charge a separate fee, which will be around 2.5% with a minimum of £2.50.

As with cash withdrawals, this makes using your credit cards for small amounts expensive, although it’s still cost-effective to use your credit cards for spending on larger amounts. In addition, if you spend between £100 and £30,000 you get additional protection should the goods prove faulty - very handy when you’re unable to return the goods because you’ve left the country!

However, there are a few cards that don’t make charges for purchases abroad. Nationwide and the Post Office make no charge at all, while Saga is free in Europe and 1% in the rest of the world.

Don’t pay for protection

Credit card repayment protection is a real money spinner for credit card companies. A typical policy will cost you 70p a month to protect each £100 of your credit card balance. It pays out if you are unable to pay your bill in future due to sickness or unemployment.

70p for £100 doesn’t sound like much, does it? But say you spend of £1,000 a month and you pay it off each month. In this case, this policy will cost £84 a year. Worse still the benefit it pays out varies greatly. Some policies pay 10% of your balance each month - others pay as little as 3%.

The danger of apathy

Although credit card companies offer lots of attractive incentives they can be quick to take them away. Miss a monthly repayment on your credit card and it can invalidate your 0% balance transfer or purchase offer. It may even do so from the date you opened the account! Setting up a direct debit to ensure you make the minimum monthly repayment each month is one way to avoid this problem.

Another lapse to avoid is not looking for a new credit card once your 0% deal has expired. Many of us do this and this is essentially why credit card companies can afford to offer these types of deals. Make a note in your diary for a month before so you don’t forget!