If you find it difficult to control your spending on credit cards, then you should avoid them at all costs. If you already have an uncomfortably large debt on a credit card, cut up the card and send it back to the issuer. However, if you are confident that you can keep your spending down, then a credit card can be a useful source of cheap borrowing while you are knocking your finances into shape – as long as it is used sensibly.
The credit card market has become fiercely competitive in recent years, with companies offering all kinds of incentives to secure your business. The shrewd consumer can use these incentives to keep down the cost of borrowing, and in some cases remove the cost altogether for a limited period. For example, some credit card issuers offer an introductory rate to new customers to tempt them to join. These rates may be as low as 3.9 per cent or 1.9 per cent for a limited period – often six months – on new purchases; they may even be 0 per cent in some cases. This means you can borrow money for six months at little or no extra cost whatsoever. This is one of the cheapest ways of borrowing money for short periods of time. Some credit card issuers also give introductory offers on balance transfers, which means you can transfer a debt from an existing card to a new card and pay little or no interest on it throughout the introductory period. However, remember that when the introductory period ends, the interest rate will shoot up, often to as much as 17.9 per cent per annum or higher, depending on the card involved. You should also watch out for ‘balance transfer fees’ – check to see if the new credit card issuer will charge you before you transfer any outstanding balances from other cards.
You will also need to check the rate the new credit card issuer will be charging after the introductory period to ensure that you do not lose money later. If you find that the rate after the introductory period is higher than that charged by your old card, you should transfer the balance back to your old card before the introductory rate period ends to avoid paying interest on the new card at the much higher rate. Alternatively, you could transfer the balance to a new card offering a low or 0 per cent introductory rate, and keep doing this every time an introductory-rate period ends. People who do this regularly are known as ‘rate tarts’. It can be a very effective way of borrowing money at zero or little cost, but lenders are beginning to catch on to it so check there are no excessive balance transfer fees before you go ahead. It may work out cheaper to switch to a card offering a permanent low interest rate for the life of the balance. Most importantly, however, you need to be absolutely sure that having more cards will not tempt you to increase your borrowing. If you doubt your ability to resist such temptation, leave this method well alone! Remember that rates vary widely between card issuers, both during and after introductory periods, and should be checked carefully. In some cases credit card issuers also charge an ‘annual fee’, so check the terms carefully before going ahead.
Some credit card companies offer ‘money-back’ cards. These allow you to earn money every time you make a purchase, usually from 0.5 per cent to 2 per cent of the transaction’s value. For example, if you buy a coat for £100 using a money-back credit card that pays 1 per cent on all purchases, you would earn £1 back on that coat. If you paid for a £750 holiday using that card, you would earn £7.50. The card issuer usually saves up these amounts and pays them to you in a lump sum once a year. Some card issuers send you a cheque, while others credit your account balance with the amount you have earned over the previous year. If you regularly pay for things like petrol and food on your credit card, these money-back items can mount up quickly, and you could receive a tidy sum from your card issuer once a year. However, in order to reap the full benefits of this arrangement, you MUST pay off your card balance in full each month, otherwise the interest you pay on your loan will far outweigh any money you get back at the end of the year. If you doubt your ability to control your spending or pay off the balance in full each month, then a money-back card is not for you.
