Making credit cards work for you

A credit card used wisely can be an invaluable flexible friend and a handy tool in your wallet.

As with any line of credit, there are pitfalls for people who don’t use their cards properly, and it pays to understand exactly how they work.

But a card can actually make you money as well as offering you some useful consumer protection.

 

Balance transfers

This is a handy way of cutting your interest payments on existing credit-card debt. Even the most competitive cards charge expensive rates of interest, and if you have a large balance then you might be facing eye-watering charges.

As long as your personal credit rating is good enough, one way to cut your interest is to transfer your card balances to a new card that gives you an interest-free period on transfers.

Sadly, the days when so-called “rate tarts” could move their balances from card to card without paying any fees at all have long gone, and today a fee (usually between 2% and 4%) is added to the amount you transfer.

But if you have high card balances that you can’t afford to clear each month, this could be a good option for you.

Some of the best deals last for well over two years before they start charging interest, so you have time to pay off the outstanding debt. Remember that you will need to make a minimum repayment each month – failure to do so will probably see your new card company withdraw the interest-free offer, and you’ll be back where you started.

Charlotte Nelson, of Moneyfacts.co.uk, said: “0% balance-transfer cards allow borrowers to chip away at their debt. With interest-free periods getting longer, with a record 31 months topping the best buys, customers can do this for even longer.”

But she added: “Customers should also consider the length of the introductory deal. If it is likely that they will not pay off the balance before the deal ends, or if a large sum needs to be paid, it may be wise to consider a card with a low rate for a longer length of time.”

 

Interest-free purchases

Depending on your credit rating, you may be eligible to take out a card that offers 0% interest on purchases for well over a year. You will still have to make a minimum repayment each month, but it means you can delay paying off the balance for some time.

Andrew Hagger, of Moneycomms.co.uk, said: “There are a number of credit cards offering 0% finance on your purchases. The best buys include cards from Santander and Tesco Bank, which both offer 0% for 18 months.”

If you don’t think you are going to clear the balance before the end of the interest-free period, make a note of the end-date in your diary and be sure to transfer the outstanding balance to a 0% balance-transfer card (see above) before the interest-free period is up.

Ms Nelson said: “If you looking to make a big purchase, a 0% introductory purchase card will be the best option.

“But customers will need be mindful that at the end of the introductory period, the purchase rate on the card will shoot up for any balance you have remaining, as well as for future transactions.

“Ideally customers should aim to pay off any debt before the introductory deal ends so not to incur any interest.”

 

Cashback and rewards

Some cards pay rewards of up to 3% of what you spend. Assuming that the things you purchase are things you were going to buy anyway, this cashback amounts to a discount on your purchases.

Similarly, a number of cards give reward points, such as Nectar or Clubcard points. These can quickly build up and can be used in a range of retailers – and, once again, this is tantamount to being free money.

 

Consumer protection

A credit card gives you added consumer protection if something you buy with it goes wrong.

Under Section 75 of the Consumer Credit Act, your card issuer is liable if there is a problem with any purchase worth more than £100. Your first port of call is always with the retailer, but if this gets you nowhere, you can go to the card company instead.

For example, let’s say you buy a television for £1,000 on your credit card but it goes wrong after just a few weeks. You take it back to the shop, but the retailer has since gone out of business. Because you used your card to make the purchase, your card company should refund you the full £1,000.

Be careful of the exclusions, though – Section 75 applies only to individual items worth more than £100. So say you spend £200 on new clothes but the shop goes bankrupt before the goods arrive. Your card company might refuse to pay out if your jacket cost £80, the trousers cost £80 and the shirt cost £40.

Although you made a single purchase of £200, because each item is worth less than £100, your card issuer might argue that you are not covered under Section 75.