Know Your Credit Cards

There are numerous credit card and current account deals on offer to choose from and it can be a daunting task to find the one that suits you best. For those with access to the internet there are many useful money comparison websites. For those who do not have access to the internet many Sunday Newspapers have a Money Section which list the best deals, however these are not as comprehensive as the internet listings.

Before searching for the best deals it is wise to consider exactly what your requirements are to enable you to narrow down the selection available to you. When searching for credit card deals there are a number of different incentives depending on your circumstances.

Interest free cards can be a useful way of spreading the cost of a large purchase over a long period.  There is usually a period of grace between 3 and 18 months when no interest is charged on the balance, however, once this period expires the interest rate can be very high so the idea is not to have an outstanding balance at the end of the no interest period. Provided you are strict enough to pay off the debt before this date this is a very good cheap way of borrowing money but if you don’t pay off the debt it can work out to be very expensive.

Balance transfer deals are useful if you have an existing credit card which has an outstanding balance on it and are looking to reduce the interest payment. Some card providers tempt new customers with 0% balance transfer cards which allow a period of time in which no interest needs to be paid on outstanding balances. You would usually have to pay a one off transfer fee as a percentage of the debt being transferred and any additional spending on the new card is usually expensive. 

For example, Barclaycard are currently offering a 0% transfer on balances for 32 months (6 months for purchases) with no annual fee.  After this period the interest rate is 18.9% and for the initial transfer there is a charge of 2.99% of the balance you are transferring.

Low interest cards are useful for those people who rarely pay off their balance each month.  These deals often do not incur a monthly fee and the interest rate usually applies for the life of the card giving the additional benefit of assisting with budgeting. 

For example, Sainsbury’s Bank offer a card with a representative APR of 6.9% (variable according to your status). There is a minimum monthly repayment rate of 2.25% or £5, whichever is the largest. Additional benefits of the card are double Nectar points on Sainsbury’s shopping and one Nectar point for every £5 spend on the card elsewhere.

Cash back cards give the benefit of earning money on purchases and are of more benefit to those who pay off the balance each month. These deals often charge an annual fee but if you repay the whole balance each month you earn back a percentage of your monthly spend. Sometimes this reward is in the form of vouchers or is limited to particular types of purchase, but it can be in cash.  The frequency of the reward can also be variable between providers.

For example, American Express offer a card earning 5% cashback on purchases up to the value of £2,500 in the first 3 months which reduces to 1.25% cashback after 3 months.  If you spend over £10,001 in a year they also give 2.5% cashback in your anniversary month.  There is annual fee of £25 and you must have a household income of at least £20,000.

For those people who have a poor or no credit history there are credit-builder credit cards which are specially designed with the intention of helping to improve credit ratings. These usually have a lower credit limit and a higher interest rate than standard credit cards. Also in this category there are prepaid cards which can be used by those who want to limit their spending and by those travelling overseas.  There is no borrowing involved and no interest charged in using these cards as the money is pre-loaded onto the card.

For example, for those with credit problems, an aqua card has a credit limit of £100 to £1,200 which can be increased after four months and which charges interest rates between 29.7% and 49.9%. There is a monthly repayment requirement of 1% or £5, whichever is the largest. 

When choosing a current account you need to consider the balance that you intend to keep in the account and the time scale for tying up the money. Some will require a monthly fee while others will require you to keep a minimum balance in the account. Additionally there could be rewards associated with some of the accounts which entitle savers to cashback provided certain criteria are met. This can mean that an account which levies a monthly charge could actually work out more beneficial provided the reward criteria are met! If you need to keep a large balance then it would be best to look for an account that pays a better rate of interest. However, this could require you to give notice before withdrawing the money, otherwise you could be penalised.  If you tend to go overdrawn then it is worth checking the charges involved as some accounts impose daily fees which can soon add up. Often the best deals are only available for internet accounts.

An example of a higher rate current account, and one with an overdraft facility, is the Nationwide FlexDirect account which pays 5% on balances between £1 and £2,500. After 12 months the interest rate falls to 1% AER.  The account must be funded each month with a minimum of £1,000 and for the first 12 months the overdraft rate is 0%. 

The Santander 123 account pays cashback on your household bills and 1% cashback on your Santander Mortgage.  There is a £2 monthly account fee and a monthly funding requirement of £500.  The account pays an interest rate of 3% on balances between £3,000 and £20,000 and for the first 4 months the overdraft rate is 0%.

There is also a Marks & Spencer current account which entitles those opening an account to £100 on a Marks & Spencer gift card, plus 1 reward point for every £1 spent in the store. It's worth bearing in mind though that you will need to spend £500 in order to qualify for a £5 voucher! The account also offers an automatic £500 overdraft the first £100 of which is interest free.

Darren Winters