The Steadfast Guide to Money

Credit Cards

There are quite a few sites on the internet offering comparisons for all the major credit cards. Rather than replicate these here, I would instead like to offer some advice on how to make credit cards work for you, rather than the other way around.

Credit Cards - What are they for?

On the face of it Credit Cards are a way of obtaining credit - or to put it another way: of borrowing money. However, with the rates of interest charged by most (if not all) credit cards, this is the worst possible use for them. With a little thought and care, you can use your card to your benefit.

Just like Debit Cards, Credit Cards are a very useful way of making purchases without handling money or writing cheques. Over the internet, they are often the only way to make a purchase. However, unlike Debit Cards, Credit Cards do not deduct directly from your bank account: each transaction is added to your card account and you're presented with a statement each month showing your purchases for the month. This is one way the card can work for you: there are usually around 4 weeks between the date of the statement and the date by which you should settle the account. This means that, for example, a purchase made two weeks before the statement date, will not be paid for until six weeks later - giving you six weeks free credit on the purchase.

But be careful: miss the payment and you'll be charged interest (at a high rate) and this is usually backdated at least to the statement date, if not to the the date of the transaction. So choose a card that allows you to pay the full statement amount each month by Direct Debit. That way you can't forget. The trouble with that, though, is that you might accidently go overdrawn on your bank account which could also incur charges. So, arrange an overdraft facility with your bank which is more than your maximum monthly spend. A couple of days dipping into this because you forgot to allow for your credit card bill will be much cheaper than the costs you would have incurred on your card if you had failed to pay off the full balance. Many banks will give you a 'free' overdraft facility where you're only charged interest for the days you go overdrawn. Have at least the same amount of money handy in an associated savings account so that you can clear the overdraft quickly.

Make a little extra...

One fairly recent innovation is the 'Cashback' card. This is a normal credit card, but everytime you use it to make a purchase, the credit card company credits your account with a percentage of the sale. This can be anything from around 0.25% to 2% or more. Obviously, the credit card company is hoping that you won't pay off your debt at the end of the month, in which case the interest charged (usually even higher than a normal card) will eat up your cashback in no time. Follow the advice above, though, and you'll keep the money. Very nice.

Give a little extra...

An alternative to the 'Cashback' card is the Virgin 'Charity' card:

Strapped for Cash?

Don't be tempted. If you run out of cash don't use your credit card to get cash out. You may be charged a 'cash advance fee', and you may be charged interest from the moment you withdraw the money. Use your debit card instead: that overdraft facility you've already arranged could come in useful again here, but it will cost very little by comparison. Beware, though, you may be charged to use a cash machine whichever type of card you use. Check first.

Disclaimer!

All suggestions are given in good faith, but if in doubt, always check what is right for you with a suitably qualified independent advisor.