How To Be Clever With Your Credit Cards

Used in the correct way, credit cards can either save or make you a significant amount of cash each year. Credit card companies have plenty of tricks up their sleeves to stop you, but a little know how is all you need to beat them at their own game.

Why you need at least two credit cards

Looked at in its simplest terms a credit card has one of two basic purposes. Either you can use it as a cheap method of paying off debt. Or it can be used to save money on purchases by delaying payment or claiming cash back or rewards.

The trouble is that one credit card will rarely be able to perform both jobs. So if you’re looking to both reduce an existing debt and use a card to fund future purchases, you’ll need a separate card for each task

A look at some of the most popular cards illustrates why this is the case. Many cards offer 0% interest on balance transfer deals for 12 months and, alongside this, also offer 0% on purchases for 3 months. Let’s say you transfer a debt of £3,000 to this card and also spend £1,500 on it in the first 3 months.

After three months your 0% purchase deal runs out and you will be charged interest at somewhere between 15% and 20% a year. That’s not so bad you might think…. I’ll simply pay off that £1,500 first. But this is where the credit card companies get sneaky.

Any payments you make will be set against the debt with the lowest interest first, in this case the £3,000 balance transfer you made. Not until this entire amount is cleared will any payment you make reduce the £1,500 bill for your purchases. By this time several months are likely to have passed and you’ll have racked up a few hundred quid in interest charges.

The solution to this is to get another card for your current spending. You’ll probably be able to get a 0% purchase deal by itself that runs for 9 to 12 months. Use this card, and only this card, for any new spending and don’t add anything to the card you’re used for your balance transfer. Problem solved!
The danger of missing repayments

One other little known fact about credit cards is what happens if you miss a scheduled monthly repayment. In most cases you’ll end up with a standard £12 charge plus you’ll incur a little interest.

If you’re currently enjoying an introductory deal like a 0% balance transfer offer it’s a totally different story though. Even though you’re not being charged any interest, you still have to make a minimum monthly repayment – usually the higher of £5 or around 2% of the balance outstanding.

However, one missed repayment could mean the credit card company withdraws its promotional deal. This means that not only will you pay interest going forward, you could also be charged interest for previous months.

Using our example of a £3,000 balance transfer from earlier, let’s say you miss a repayment near the end of a twelve-month offer. If the standard interest rate on the card is 20%, you could be charged almost £600 in back interest – all for missing one single repayment

Always check the amount you’re required to pay and by when each time you receive a credit card statement. It’s typical for credit card companies to move the date around by several days each month and sometimes even change the terms for the minimum amount you have to repay.

This is one downside of having more than one credit card of course, as it means you have at least two payments to make each month. One way of getting round this is to set up a direct debit payment for each card. But it’s still worth double-checking each month to make sure any payment you’ve set up will be sufficient.

Plan ahead for your next credit card

Some of the credit card offers on the market almost seem too good to be true. Indeed most of them are initially loss-making for the credit card companies. In order to turn a profit, they’re relying on us to slip up in some way. One of the most common ways for this to happen is for you to leave a balance on their card once your introductory offer has run out.

The credit card companies know that a large percentage of people will do this. One survey reckoned the average balance transferred was just under £3,000 but around £2,100 was still owed once the balance transfer deal expired. It’s all too easy for this to happen. You’ve taken out a card a year or more ago and, once you start having to pay interest, it seems like too much effort to move what’s left.

How much could this cost you? If you’ve already paid off most of your balance then this may not be a problem. But if you’ve still got a £3,000 balance on your card then this could cost you £50 in interest each and every month. Borrowing on credit cards is an expensive option once you’ve got no special deal to ease the burden

Make a note in your diary for a month or so before your credit card deal expires. This will give you plenty of time to decide what to do next and apply for another card if you still have a balance to clear.
Know who’s behind your credit card

Although there are many hundreds of different credit cards out there, the majority of them are operated by a handful of big players. You might think this doesn’t matter but, when it comes to searching out a new balance transfer deal, it can make a big difference.

Many credit card companies won’t offer you a 0% balance transfer deal as a new customer if you’ve already got another credit card with them. So it pays to know who’s behind your credit card. MBNA and HBOS are two of the largest players in the market, followed by HSBC and Royal Bank of Scotland. GE Capital is another one to watch out for, as they operate many of the major store cards

So when you apply for a new card, make sure you know who’s behind your current credit card and who operates the one you want to apply for. It saves wasting time getting rejected for a balance transfer deal and avoids getting an unnecessary mark on your credit report.

To find the best credit card visit our credit card comparison section