Credit card guide

Credit card information

Credit cards are essentially a form of readily accessible, renewable loan. They allow the user to buy items that can be paid for later, and do not require the entire balance to be paid off each month (although interest will generally be charged if you don’t clear the outstanding balance). Debt can be accumulated on a credit card but you have to make at least the minimum stipulated repayment every month.

All credit cards operate in the same way, but different companies have different rates, fees, terms and incentives. Incentives can either take the form of an introductory 0% interest rate offer for purchases or balance transfers or an ongoing credit card rewards scheme. However many cards you use, the trick is to understand how they work so that you can maximise their potential and avoid the charges as much as possible –this credit card guide will explain the differences between credit cards so that you can choose the card that best suits your needs.

Types of credit card

The most common credit card rewards are low interest rates on balance transfers and purchases. This refers to either the movement of money (transferring a balance from one card to another) or the buying of goods (purchases) when using a credit card account.

Balance transfer cards

If you have a squeaky clean credit history, you may be eligible for one of the various introductory 0% interest balance transfer cards, which will allow you to shift debt from another credit card to your new one and avoid paying interest on this sum for the length of the deal. Note that most cards will charge a fee of up to 4% if you use their 0% balance transfer deal as a one-off fee.

These cards may charge interest on purchases, so if you plan on using your credit card for spending, it may be preferable to get an additional card that offers a 0% introductory rate on purchases. Some cards offer a 0% introductory rate on both balance transfers and on purchases.

Balance transfer cards can be a great deal, but make sure that you understand the terms and conditions that apply. The low or 0% interest rate typically only applies for between six and twenty months, after which the APR will rise to the card’s standard rate which will be much higher. Remember that if a new credit card is offering balance transfers at a preferential rate, there is usually a time limit of between 60 and 90 days for the transfer to be made.

You also need to be careful, as you will generally not be able to get a 0% balance transfer between two cards operated by the same organisation. For example, if you hold an HSBC credit card and you are looking to transfer the balance to your new First direct credit card then you will find that this is not allowed at a 0% introductory balance transfer rate. This is because HSBC and First direct are under the same ownership.

0% purchase cards

Once again, a clear credit history is generally a prerequisite for these offers, which will allow you to make purchases on your credit card without incurring interest over length of the deal (typically 6, 12, or 14 months). 0% purchase cards effectively allow you to borrow money at no cost, as long as you ensure that you meet the minimum repayment cost each month and clear the balance of the card before the 0% offer period ends.

As with balance transfer deals, keep an eye out for the terms of the deal. The length of the offer will vary from card to card, making some deals more attractive than others.

If you are enjoying a 0% deal do remember that if you transgress the terms of the card, for instance by making a late repayment, the card provider may immediately terminate the 0% deal and charge its standard interest rate from that date.

Credit card rewards

In addition to purchase and balance transfer offers, providers will often offer additional credit card rewards in order to entice you. As a general rule of thumb unless you always repay the entire outstanding balance every month then you should select a card based on its interest rate rather than anycredit card rewards because such charges will generally outweigh the value of any potential rewards. The four main varieties of incentive are cashback, shopping rewards, airmiles and points schemes.

Cashback credit cards

Some cards offer a percentage cashback of your annual spend, which can be a good bonus for credit card use. Beware though, as there may be strings attached, such as the cashback amount only applying to purchases at specific retailers or types of retailer. Often the amount you can earn in cashback is capped, and in recent years card issuers have been reducing or withdrawing cashback credit cards altogether.

Shopping rewards

Alternatively, if you regularly shop at a particular supermarket then choosing their branded credit card will help you to accumulate its reward points. These points can then be worth up to three times their value when used with the supermarket’s participating partners. Some credit cards offer shopping discounts at a range of retailers.

Air miles

Some credit cards will reward you with air miles that can be used to get free flights from the associated airline. Bear in mind that you will probably still have to pay taxes and charges.

Points schemes

A number of credit cards offer points schemes which can be redeemed for a range of goods or services when the requisite number of points has been collected.

Affinity Cards

If you want to provide additional support to your chosen football team or charity, then affinity cards can be a good way of achieving this. When you first use your card, and occasionally every time thereafter, a contribution will be made to the charity or football club.

Cash advances

It is generally expensive to get a cash advance with a credit card. You will get charged a fee – typically about 3% - as well interest from the date of the cash withdrawal. Interest on cash advances is generally charged at a significantly higher rate than that levied on purchases.

Paying off your balance

If you do intend on taking advantage of credit card offers, and do not intend to repay the balance in full every month, then it may be wise to get two cards: one for a 0% balance transfer cards and another for 0% purchases. Getting one of each can be a good idea, because you may be able to a get longer 0% term for each requirement from separate cards

Even if you don’t qualify for a 0% deal, standard credit cards can be a good way to borrow money over the short term, providing you pay your bill in full – and on time – each month.

If you can’t repay the entire balance then try and repay as much as you can because, if you only make the required minimum repayment each month then you will probably have to pay interest on the debt for many years, and, in some cases, decades.

APR (Annual Percentage Rate)

If you know that you won’t be able to pay the outstanding balance of your bill each month, the most important credit card information to look out for is a competitive annual percentage rate (APR) for purchases and balance transfers. The added benefit here is that most purchases and balance transfers are charged at the same interest rate, so you only need to use the one card.

However, if you know that you will always pay your monthly bill on time, and in full, each month, the APR is irrelevant as you will never incur interest charges. Instead, you should look for the best credit card rewards and benefits.

Be aware that the type of credit card you can obtain will depend to a large extent on your credit history as credit card companies have become more selective in choosing customers. For more advice on how companies determine your credit history and how it may affect you, take a look at our credit scoring guide.

Personal pricing

Credit cards are becoming increasingly hard to get for many people. If you have a good credit rating and secure employment then you will generally be able to take your pick from the cards available. As an individual’s credit rating deteriorates it becomes increasingly hard to get a credit card. Significant numbers of credit card applications are rejected, and, if a credit card is offered, you may find that you are subject to a higher interest rate than you expected. This is because the credit card companies take note of the circumstances of the individual when determining whether to lend, and, if so, the interest rate to be charged using ‘personal pricing’.

Top tips on credit cards

• If you only make the minimum monthly payment each month, it will take many years to repay the balance and you will end up paying back significantly more than you borrowed.
• Try to pay as much as you can each month – ideally the whole amount due.
• If you are taking advantage of an introductory 0% deal, be sure to set aside enough money to pay the final bill and diarise the ‘due by’ date so that you make the payment on time or seek to transfer it to a more favourable rate elsewhere.
• Introductory offers are designed to attract new customers. At the end of the introductory rate, you will be moved to the standard rate, which will be considerably higher and therefore more expensive.
• It is not unusual to see credit card rewards reduced over time or for it to be made more difficult to obtain the reward.
• Review your credit card information on a regular basis.
• When switching cards, it can take several weeks from application for a new card to arrive, so plan at least one month ahead.
• Remember that balance transfers, purchases and cash withdrawals may be charged at different rates of interest.
• Don’t take out payment protection insurance unless it is suitable for your circumstances. Make sure you understand the policy details and that you are eligible to claim.
• Do make arrangements to set up a direct debit to ensure that at least the minimum payment is collected every month to avoid missed or late payments.

By reading this credit card guide, you’ve already taken one step towards choosing the credit card that will benefit you most.

You can use our simple Star Ratings tool to find and compare credit cards which suit your needs, whether you need a basic card, or one with a wide range of features, benefits and incentives.