Credit Cards – Which Should You Choose?

Credit Card Balance Money Transfer Spending SamSaid Sam Said
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Deciding on the right credit card is a task in itself, especially when there’s an abundance of choice when it comes to providers, rates and credit card types to choose from. Let’s take a look at the differences to help you make the right choice.

What types of credit cards are there?

Aside from the tons of providers out there, the different types available only really come down to the following:

      • Balance/Money Transfer
      • 0% Spending
      • Bad-Credit Credit Cards
      • Cashback and/or Rewards
      • Travel Credit Cards
      • All-Rounders

Each one has its own benefits, but only if you’re going to use it right!

NOTE: It’s important to remember that you should only spend within your means, and pay back the credit card you have in full each month to avoid unnecessary charges that may apply. At the very least, you should always make the minimum repayments every month though this will take longer to clear.

So let’s break each one down below shall we?

Balance/Money Transfer Credit Cards

These types of credit cards can come in very handy if you already have other debts you pay interest on, as you can shift the balance onto a credit card that has 0% interest for a set period of time paying only a small transfer fee normally up to 5%.

A Balance Transfer credit card does what it says on the tin: it transfers the balance from a credit card you already have to the new credit card, usually for a number of months interest-free, or for a fixed low-rate APR so you know exactly how much interest you will pay so long as there is a balance on it. Transfers must be made within the specified time period from opening the account; normally around 60 days.

As an example: let’s say you have a Barclaycard credit card with £2,000 on it and you’re paying interest of 24.9% APR. You apply for an MBNA credit card with a 26 month 0% balance transfer period which you’re successful for with a credit limit of £3,000 and a 1% transfer fee. This means you can transfer the £2,000 from the Barclaycard you have to the MBNA card, costing you just 1% of the balance transferred (£20), and you now have an interest-free period meaning every penny you pay back is deducted from the balance. Again, you must always make the minimum repayments each month and ideally clear the balance before the end of the 0% interest-free period.

A money transfer credit card works in exactly the same way, the only difference being is that the money is transferred directly into your bank account so you can pay other types of debts such as loans, overdrafts, catalogues etc. Often the interest-free period is less and the transfer fees are slightly more, but in comparison to what you could be paying in interest on debts like an overdraft, a money transfer could also be a good option for you.

0% Spending Credit Cards

Similar to a balance/money transfer credit cards, these types of cards are designed for that big purchase you might need to make without paying interest for a set period of time.

As an example: Say you’re planning for a wedding and need to pay £5,000 to secure a venue. A 0% spending credit card from MBNA could allow you up to 27 months interest-free so long as you make at least the minimum repayments each month. As usual, be sure to clear the balance before the end of the interest-free period.

Purchases will need to be made within a specified timescale from opening the account which is around 60 days under normal circumstances. BUT be aware! If you make any other purchases outside of the credit card provider’s specified term, you will likely have to pay interest on it.

Bad-Credit Credit Cards

These types of cards can be both helpful and dangerous, so it’s worth noting now to tread very carefully with these cards.

The reason why I say this is because my first credit card was a bad-credit one to try and build my credit history up. Unfortunately, because of the very high interest rates (and my own naivety) it quickly went into a downhill spiral.

I know I’ve not made this sound like a great option, however if you’re good at limiting your spending and will repay the balance in full on time every month, these cards can be great to build your credit history.

As an example: If you have little to no credit history – or if your current credit history has a few black marks against it from things like missed payments to declaring yourself insolvent – then a bad-credit credit card will help you build, or rebuild, your credit history so long as you keep up with at least the minimum repayments each month.

This is because the interest rates can be in excess of 30% APR and credit limits can be low to begin with. Lenders who provide credit cards for bad-credit realise the high risk of lending to people with a bad credit history (or none at all) hence the reason they charge a lot of interest on low credit limits.

Nevertheless, if you’re going to use these types of cards responsibly then they can help massively. Although, there are alternatives which I’ll be talking about in another one of my articles, especially for those who haven’t long turned 18 and looking to give their credit history a boost without the risk.

Cashback and Rewards Credit Cards

Some credit cards out there will reward you for everyday spending in different ways. Whether it be in cashback, airmiles, points or discounts on certain products like flights where you only pay the taxes, you could be reaping the rewards (quite literally) in many different ways!

As an example: The American Express Platinum card at the time of writing this post could offer you 5% cashback on your spending within the first 3 months of opening the account (up to £125) and then 1% after up to £10,000 and 1.25% from £10,001+. So if you’re a big spender, but one that usually repays in full every month, you could earn a decent wad of cashback!

Most cashback and reward credit cards have an annual fee, and may have a minimum/maximum amount of cashback and rewards you can earn per year. Just be sure to make at least the minimum repayment each month, as you could lose out on anything you’ve earned so far.

Like the sound of earning cashback? Why not read my other article about cashback to learn more.

Travel Credit Cards

The benefit of these credit cards is that you can take advantage of some of the best exchange rates when on holiday along with the added reassurance that you’re spending abroad is protected.

Some allow you to withdraw money when abroad without incurring a massive amount of interest, however most of the time interest still applies even if you pay in full each month so it’s worth double checking with each credit card provider what their terms and conditions are for using the card outside of the UK.

As an example: Let’s say you’re looking at obtaining Euros to spend in Italy for a week away. Rather than accepting a low exchange rate here in Britain, why not use your travel credit card to get a better rate abroad and just take a small amount of Euros with you for places where card isn’t accepted? That way you can pay off the credit card with the money you would have used otherwise to get Euros, save yourself from carrying around a large sum of money on you and really enjoy your holiday knowing you can get more for your money.

Once again, make sure you make at least the minimum repayment each month!

And you want to go on holiday using something other than a credit card for your spending, then check out my other post about Monzo who can give you Mastercards’ best rates using their debit cards without incurring interest (so long as you don’t go into an overdraft).

All-Rounder Credit Cards

An all-rounder credit card will allow you to combine balance/money transfer with spending at either 0% for a period of time or a fixed interest rate, providing the balance/money transfer and spending is done within a certain amount of time from the account opening, again, normally 60 days.

As an example: If you were successful for one of these cards with a credit limit of £5,000 and 0% for 25 months on both balance transfers and spending, you could balance transfer £2,000 from another credit card to the all-rounder (subject to any applicable transfers fees) and then spend another £2,500 on some home improvements, meaning you have 25 months to pay back a total of £4,500 interest-free.

I know I keep banging on about this, but you must always at least make the minimum repayments each month and ideally pay the balance off before the interest-free period ends.

In Summary

So as you can tell, there are a wide range of credit card types out there to choose from that can help save you money on paying your debt back, reward you on your everyday spending or help give your credit history a boost.

It’s very important to remember that if you fail to make the minimum repayments on time every month, whatever deal you were initially offered and agreed to could be terminated which may leave you in a worse position. Furthermore, missing payments or making them late will likely result in your credit score taking a hit and prevent you from gaining credit in the future, especially if you’re thinking about obtaining a mortgage.

As always with any lender, make sure you read their terms and conditions. It’s not as scary as it used to be, as they’re meant to make things easy to understand so you don’t feel like you are going to be stung with any hidden costs.

NOTE: Credit limits are decided by the lender and it is not always guaranteed what you’ll be given until you’ve submitted an application and they agree to offer you a credit card.

Tips to keep in mind

    • Minimum Monthly Repayment Amount
      Each lender should give you a “Summary Box” which outlines the deal you’re applying for (i.e. how long the 0% balance transfer rate lasts for), and will tell you your minimum monthly repayment amount as a percentage. This is usually 1% of your balance or £25, whichever is higher, plus any arrears that may need to be paid back if applicable. So if you owe £5,000, 1% of that amount would be £50. But if that credit card states 1% of the balance or £25 and you owe £1,000, then you would pay £25 because 1% of £1,000 is only £10.
    • Statement and Payment Due Date
      You might think these are the same thing. In fact, the statement date is around 2 weeks prior to your payment due date. This is because your statement determines what your next monthly payment amount will be and when it’s due. BEWARE! If you need to change your payment due date quickly, make sure you do this before your statement has been generated as the change won’t then take effect until the following month under normal circumstances. It’s also worth noting to take out the credit card you need just after the date you normally get paid so it falls around the same time every month.
    • Closing Credit Card Accounts
      You might think closing your old unused credit card would be a good idea. The fact is that the longer you hold a credit card account (and use it little and often of course) the better this looks. That’s not to say you should have a load of unused credit cards however, as having too much available credit may also prevent you from obtaining any more. Basically, if you have more than 1 credit card with no balance on them, keep the oldest 1 or 2 and make sure you spend a little bit on them every so often whilst paying them back in full each month.
    • Credit Limits
      Ideally, you don’t really want to use more than 25% of your available credit limit. This applies to all credit cards combined, e.g. if you have 3 credit cards that have a total credit limit between them of £10,000, you shouldn’t have a balance more than £2,500 between all of them. You should also be sure to stay away from the top end of your credit limit too, as this can ring alarm bells with lenders if you’re trying to apply for further credit.
    • Increasing/Decreasing Your Credit Limit
      It’s nice to be given more money to spend, however we all know how dangerous this can be. Nowadays, you have more control over whether you wish to be automatically given increases to your credit limit, be asked to accept a credit limit increase or to opt our altogether. If you don’t think you need the increase, or if you think you’ll be too tempted to spend it, don’t be scared to deny it because turning the offer down doesn’t have any effect on your ability to gain credit in the future with the same or a different lender. Lastly, if you think your credit limit is already too high, you can request to decrease it to a more suitable level for you if you wish.
    • Eligibility Checking vs Credit Application
      You should always check your eligibility with a lender before applying, as you could ruin your chances of getting a good deal, if any at all, if you repeatedly apply for credit in a short space of time. If you have signed up for your credit report (which even the likes of Experian offer for free out of their available subscriptions) then these are the best places to check your eligibility before applying because they do this on a large scale, saving you time and effort in entering your details over and over again.

And there you have it! I’ve tried to cover a lot of ground here so you feel well informed, but as ever I’m open to questions if you have any so feel free to contact me if you need to. Or if you know someone who you think could benefit from this article, feel free to share it using the social media icons or tell them about my website so they can come and visit whenever they please.

All information correct at the time of writing this post.

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