How do you choose which credit card is best for you? The answer depends on what you want to use your card for. A credit card gives you a credit (or a loan) for a certain time period before charging you interest. Different card providers charge different amounts of interest depending what you use it for.
In essence there are three ways to use a card:
- Purchases. Simply buying something on credit and then paying for it at a later date.
- Balance transfers. Moving an outstanding debt from one card to another.
- Withdrawing cash from a cash machine.
Card providers will charge different amounts of interest for each of the above 3 ways you use it. Usually, although not always, the cheapest debt is paid first meaning you get charged interest at the highest rate.
You get a new card and transfer ?2,000 debt from another card. You then buy something costing ?300. You then withdraw ?200 from an ATM. At the end of the month your debt will be ?2,500. You can’t afford to pay off the full ?2,500 at the end of the month but you can pay ?200 each month.
However, you are not charged the same rate of interest for each item. Instead you are charged 6% on the transferred debt (i.e. ?2,000), 15% on the purchase (i.e. ?300) and 20% on the cash withdrawal (i.e. ?200). Not always, but usually, the ?200 you pay each month will go to clearing the transfer debt first and the cash withdrawal last.
This means you are paying off the debt that is accruing the least interest first and the debt that is accruing the highest interest last. The net result is you pay back significantly more than you would have if you had cleared the highest interest debt first.
Hopefully the above shows why you need to establish what you intend using your card for. Once you decide you need to have discipline to stick to using it for that purpose only. If you believe you may need a card for each or are unsure that you will have the discipline required, then it is much better to get separate cards for an individual purpose.
An important point is: please, please, and please again do not use a card for cash withdrawals unless you absolutely and completely have to. Interest rates for cash withdrawals on cards are always very high and interest gets charged from the minute you make the cash withdrawal. Hence, by the time you get your monthly statement you could have accrued weeks of interest on the cash withdrawal.
To determine what credit card you should choose find the statement below that best corresponds to you and your needs:
I always pay the full balance when due
If you use your card for purchases and always pay the full balance off at the end of each month then you will never pay interest on your card.
Therefore, you can ignore the interest rates and look for a card that rewards your spending. Several cards offer reward schemes such as cash back, loyalty points and donations to charity.
I can never afford to pay the full balance when due
If you use your credit card but can’t afford to pay the full balance off at the end of each month, then you will pay interest on your outstanding debt, even if you repay the minimum amount.
Therefore, you need to look for a card with a low standard rate (APR). Many cards have a zero interest introductory period which can be good but be careful of these as once the introductory period has ended you will start to get charged interest unless you pay off the full balance.
If you have already built up a debt on an existing card then you should maybe look for a balance transfer – see “I have a debt but can’t afford to pay if off in full” below. However, if you are still spending more than you are paying, this strategy is only deferring the problem to a later date.
I have a debt but can’t afford to pay if off in full
I will not bang on about reducing the debt, stop spending, etc. Every website goes on about it and while it is true often it is very difficult to stop spending and the last thing you want to hear is another person/website on your case about it.
Assuming you can stop adding to the debt, then you want to go for cards that offer low interest rates on balance transfers.
This means you transfer the debt from your existing credit card onto a new credit card. The new card having a lower interest rate than the existing one, meaning you have less to pay back in the long run. Many card providers now offer 0% interest on balance transfers (0% APR balance transfers) for periods up to 15 months. Therefore, you could have 15 months in which to pay off the debt before you get charged any interest. Most 0% APR balance transfer credit cards will charge a one off fee for doing the balance transfer – this is usually 2 or 3 % of the balance.
If you can’t stop adding to the debt, then you want to go for a credit card that offers both low interest on balance transfers and low interest on purchases. Many credit cards now offer 0% APR on balance transfers for 15 months as well as 0% APR on purchases for 3 to 6 months.
This means you transfer the debt from one card to another as discussed above. Additionally, you can continue to spend on the card without accruing any interest on these purchases. All of course for the period the 0% APR on balance transfers and 0% APR on purchases lasts for. Once these periods are up you start accruing interest.
I only use my credit card when travelling
If you travel regularly and use a credit card when abroad you will likely pay an overseas usage fee. There are some that don’t but most do charge an overseas usage fee.
Generally it is a double-edged sword. Cards with low or zero overseas usage fees tend to give you lower exchange rates. Whereas cards with higher overseas usage fees tend to give you better exchange rates.
Credit card exchange rates are based on the MasterCard and Visa wholesale rates, with a percentage usually added by the provider.
You need to look at a few things and weigh up the pros and cons:
- The overseas usage rate/fee.
- Does the overseas usage rate differ in different countries or parts of the world. Which country/region are you regularly visiting?
- What, if anything, does the card provider add to the MasterCard/Visa wholesale rate.
- What other facilities does the card offer (e.g. provision of a replacement card, international assistance package, insurance, air miles, etc).
Other factors to consider
There is constant media attention given to people being caught out and seemingly ripped off by ‘hidden credit card charges’. Particular things to look out for include:
- Late payment fees.
- Returned payment – if your cheque bounces or your direct debit is declined for some reason.
- Exceeding your credit limit.
- Cash withdrawals – as mentioned above, please avoid this at all costs.
- Balance transfer fees – as mentioned above.
- Overseas usage fees – as mentioned above.
Now you know the key criteria for comparing credit cards you can easily pick the top credit cards for your needs.
Ben graduated with a business and economics degree back in 1998. Following many years service in the financial sectors Ben has turned his attention to helping everyday people with their finances. He has seen first hand how many people struggle with their financial situation primarily due to poor advice and misunderstandings of how money works. His latest venture is a blog that allows users to compare credit card rates in the UK.