How does a credit card work?
Credit cards effectively lend us the money for each transaction we make on them, which makes them useful when it comes to covering the cost of bigger purchases. As all credit card spending is a form of borrowing, we'll be expected to pay interest - calculated daily - unless we pay off the balance in full each month.
Beware the "up to x days interest free on purchases" claims made by many card providers. The first of these days is the first day of each billing month; transactions made on the last day of a billing month have a much shorter interest-free period. It's the spending made during each billing month that we need to clear each time in order to avoid paying interest.
How can I spread the cost of a large purchase without paying more?
People who need to make a large one-off transaction might want to consider a 0% purchase credit card. These add to the budgeting flexibility of a normal credit card by suspending interest for a certain number of months – allowing us to pay off big expenses over a longer period without paying any extra – as long as we keep to the terms and conditions, and always make at least the minimum repayment each month. Compare 0% purchase credit cards here.
This will be at least 1% of the outstanding balance plus that month's interest and any fees outstanding, or an amount set by the provider, whichever is the greater. Not paying at least this minimum will result in a default fee and a note going on our credit file, which can affect future borrowing; if we pay just the minimum each month it'll take far longer to clear the balance and incur far more interest.
How can I use a balance transfer card to save money on interest?
Balance transfer credit cards can help us save money on existing borrowing. There are two types: those that offer a low rate of interest for the life of the balance, and those that charge no interest for a set period.
The key with 0% balance transfer credit cards is being disciplined enough to stick to the terms and conditions, and to completely pay off what we owe before the interest free period ends. Otherwise we can end up paying the card's standard rate of interest, which can make a considerable, and expensive, difference to how much we owe. Also bear in mind that 0% balance transfer cards often charge a fee of up to 3% of the amount being moved across. Compare 0% balance transfer credit cards here.
Low rate balance transfer credit cards may seem less attractive, but for those who have smaller – or very large – balances to transfer, they can often be more useful than a 0% deal. A short term life of balance deal with no transfer fee can compare well against an interest free card with a standard transfer fee; low rate deals don’t come with any deadline, and can therefore be more affordable month to month for those with bigger debts.
How can I earn rewards on my spending?
People who can, and will, pay off their outstanding balance every month can make a credit card pay them, rather than the other way around. The rewards credit cards offer include cash back on certain kinds of spending (compare them here), loyalty points, and air miles (compare these here). The level of reward varies from card to card – and with some cards, it can depend where we're spending.
Rewards credit cards are most worthwhile when we use them for everyday spending, the sort we know we can pay back in full every month without fail – as paying interest will rapidly outweigh any benefit or rewards we earn. As some of the more rewarding cards come with annual fees, it's also worth having an idea of how much we need to spend – and repay – each month to earn enough back to comfortably cover that fee.
What protection on purchases does a credit card offer?
Even the most cautious people can benefit from the extra protection a credit card gives us, compared to using cash or a debit card. The most famous extra protection is that offered by Section 75; this makes the cardholder equally liable with the retailer for any purchases of between £100 and £30,000 made with the card. Find out more on Section 75 here
Even if we've only paid for the first £100 of a more expensive item on the credit card, we're covered for its full value. Most importantly, it covers us if the retailer goes bust – say we've put a deposit on a new kitchen but the company folds before it can be fitted – but it also covers us if an item we buy is simply faulty or doesn't turn up.
Chargeback offers a similar, although weaker, form of protection – and it also applies to debit cards. If there is a problem with goods or services paid for by card, and complaining to the retailer has no effect, we can ask the card provider to try to recover the money for us – provided there is evidence of breach of contract. Find out more on Chargeback here.
Some – but certainly not all – credit cards also offer purchase protection insurance against loss, theft and damage for certain items or services bought with the card, for up to three months after purchase. There are often exclusions – second hand good and electronics often aren't covered, for example – and there are often limits on how much we can claim, whether per item or annually. Find out more about purchase protection here.
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