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By Russell Cavanagh
Staff Writer, 26 September 2008
DIFFERENT credit cards have their own selling points. One happy chap's cheap credit card deal can just as easily cause years of miserable, mounting debt for another.
All credit cards show their best side to attract attention to their better points. Every credit card provider needs to make money and will primarily profit from mistakes we ourselves make in not choosing the right credit products fitted to our own particular circumstances.
What should borrowers consider when choosing a cheap credit card to avoid the grief of needlessly wasting money?
Issues of interest
Interest rates may vary on the same cheap credit card. Credit cards can have an initial period of 0% interest on balance transfers but charge interest on purchases - and vice versa.
It's sensible to choose a balance transfer credit card featuring introductory 0% interest if you need to shift other problem accounts to stop further charges and interest. This offers temporary relief during which to find money or make instalment repayments to the debt.
Some cheap credit cards tempt us with long 0% interest on balance transfers as well as offering (usually shorter) time in which to make purchases at 0%.
With both these types of cheap credit card, it's wise to resist using anything other than the balance transfer facility. Repayments would almost certainly be allocated to paying off any further borrowing only after the 0% and cheaper transactions are settled - a potentially expensive situation.
For example, if you were paying off a 0% balance transfer over 12 months but decided to make a £250 card purchase meantime, the purchase balance could actually increase with interest until the original transfer balance was paid off. This would hold true even if you made an extra payment earlier, in the mistaken belief you were paying off the purchase borrowing. This is both a tricky and important point.
More issues of interest
Generally, credit cards shouldn't apply interest if balances are repaid fully and in time each month. However, nearly all credit cards apply significantly higher interest rates calculated from the moment you withdraw cash at ATMs or ask for cash back in, for example, stores or supermarkets.
Some credit cards calculate interest on a monthly or weekly basis. Such credit cards are rarer nowadays and are largely superseded by cheap credit cards running interest on a daily basis. Daily calculations are better as they work out cheaper. Check the small print on the credit card documentation.
Otherwise, a credit card carrying regular 13.9% interest on, say, purchases will obviously work out cheaper to use than one charging 17.9%. This is most relevant if the balance won't be repaid in full each month and the remainder rolls over and is therefore subject to interest.
Finally, it also pays to note when any low interest deals expire before regular charges start to apply. You might want to think about a balance transfer credit card if this is going to pose a problem.
Low APR cheap credit cards charging less interest include Barclaycard Simplicity and Capital One Low Rate (6.8% and 8.5% respectively). You can compare the cheapest low interest rate credit cards here.
Fee matters
Most credit cards charge fees for some or all of the following: balance transfers, purchases made abroad, annual card membership subscription, cash transactions.
The Post Office offers two products - their Post Office Platinum and Post Office Classic credit cards - that do not carry foreign transaction fees.
Fees are usually calculated at 2% to 3% of balance or transaction value and can apply at the same time as other fees - e.g., a foreign transaction fee on top of a purchase transaction fee when buying on your card abroad.
Remember too that unpaid fees will add to the overall balance and will attract additional interest.
Cash issues
As mentioned earlier, credit cards are wholly unsuited to drawing cash out of ATMs or asking for cashback at the supermarket.
Cash transactions will attract fees, significantly higher interest, or both. Interest runs from the time of the transaction. Interest-free repayment periods - and even 0% deals - never include cash transactions.
When repayments are allocated to different balances owed on your card, cash withdrawals will be last to be credited and so the high interest will linger over the full period until you clear the full card balance.
Keep life simple. Best use your debit card for getting cash.
Students
Students can be in a good position to obtain better quality credit cards, even with no credit history. Lenders will gamble they stay loyal after graduating and entering well-paid professional careers.
Interest rates tend to be slightly higher than those found on mainstream credit cards and balance transfers are almost unheard of. However, some - such as the Barclaycard Student credit card and Natwest Student credit card - allow for 56 day repayments before interest is applied if as balances are reliably settled fully and on time.
Student credit cards also usually bring rewards - discount travel, insurances, book clubs, etc - designed to be useful for making student life cheaper, easier and more enjoyable.
Some students might want to access mainstream credit cards with slightly lower interest if working during vacations. However, it is unlikely any card rewards would be as good or useful.
Credit status
Borrowers with a history of missed or late repayments, court judgments, etc, will likely find the range of available cards greatly reduced to only those bearing higher interest.
However, these bad credit rating credit cards, whilst better avoided in most cases, can be useful for rebuilding a decent credit history. If you make small purchases, avoid cash transactions and repay fully within the time limits (usually a month), you might gain access to more mainstream credit products after six months to a year. However, they demand great control and caution.
If you are certain to repay balances fully and on time each month, you needn't worry so much about higher interest cards since interest will not be charged. Careful and considered use of a bad credit rating credit card can really help to improve and strengthen your credit rating, opening up more mainstream choices to you in the future.
Conclusion
It pays to look into the available cheap credit card offers and deals. Match them to your specific credit card needs using our credit card comparison tables to get the cheapest deals. You can certainly avoid being caught out and unnecessarily out of pocket.
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