The UK: a nation of 48 million adults and 75 million credit cards, or 1.6 cards per person aged over eighteen. Blimey!
In my view, carrying around 75 million credit cards is akin to having 75 million razor blades in our wallets and purses. That's because used wisely, credit cards are a terrifically useful financial tool, but used carelessly, they can leave you nursing nasty wounds, financially speaking!
Indeed, according to the British Bankers' Association, at the end of March, we owed £66.5 billion on our credit cards, three-quarters (75%) of which is interest-bearing debt. So, the UK's 31 million cardholders owe an average of close to £2,200 apiece, which is a couple of months' wages to most workers. What's more, with the average annual interest rate at around 15.5% APR, card companies are making a pretty penny from our addiction to plastic. Boo!
Anyway, without further ado, here's my guide to making the most of your flexible friends and becoming a skilled card sharp. Enjoy!
PART ONE: Avoiding interest
Here's an interesting fact: when we use credit cards, we tend to spend more: over a third (34%) more, according to money education charity Credit Action. Hence, many of us spend more on our plastic than we can afford to repay, which means that we end up paying sky-high rates of interest on this over-spending.
Borrowing on credit cards, especially over the long tern, is an incredibly expensive way to run up debts, thanks to their high rates of interest and low minimum monthly repayments. However, there are several ways that you can slash your interest bill -- even to zero, if you play your cards right!
'0% on balance transfer' deals
These are the pinnacle of credit-card deals. Imagine being able to transfer all of your existing credit- and store-card debts to a card which charges no interest on these balances for a year or more. No bank would offer such a mouth-watering deal, surely? Actually, there are more than fifty different 0% balance-transfer deals on the market, with introductory periods ranging from five months to a year or more!
Learn the rules of the transfer game here and then check out the cracking 0% credit cards in our Card centre.
'Lifetime balance transfer' deals
If you can't be bothered (or lack the discipline) to surf your debts from one 0% deal to another, another attractive option is to opt for a 'low rate for life' transfer deal. For example, according to independent financial researcher Moneyfacts, these are the cheapest lifetime transfer rates:
So, transferring your debts to one of these beauties could mean reducing your annual interest bill by, say, two-thirds, if you're currently paying 18% APR. Just one word of warning: all spending on these cards incurs interest at the full standard rate for purchases, so don't go shopping with them!
Permanently low rate cards
A few cards charge low rates on both spending and balance transfers. For example, instead of paying standard interest rates of around 16% APR or more, you could be paying these low rates:
As you can see, the Co-operative Bank Clear card charges the same rate (9.9% APR) on purchases, balance transfers and cash withdrawals (with no fees), which sets it apart from other credit cards.
PART TWO: Dodging rip-offs
Minimum monthly repayments (MMRs)
If you're in debt on your credit cards, you need to work hard to pay off those debts as quickly as you can. Thus, avoid paying your minimum monthly repayments at all costs, because your debt will barely shift if you try to repay it at, say, 2% a month.
Instead of paying MMRs, here's a clever trick: divide your balance by 25 and then set up a level monthly standing order or Direct Debit for this amount. For example, if you have a balance of £2,000, set up a monthly standing order for £80. By paying what amounts to a monthly 4% of your original debt, you will slash years off the life of your debt.
Bin your store cards!
Store cards are the Devil's debt, because they charge ultra-high interest rates, plus extortionate premiums for add-on insurance policies. Unless you always repay yours in full every month, my advice would be to cut them up, transfer your existing balances to a 0% card, and switch to using a cheaper credit card!
Don't fall for expensive insurance and other extras
If your card issuer provides free price protection, purchase protection, travel accident insurance or an online fraud guarantee and Internet delivery protection, then feel free to take full advantage of these add-ons. Just don't be suckered into paying for them, as you'll pay well over the odds.
In particular, steer clear of rip-off payment protection insurance (PPI), which covers your monthly repayments if you can't work due to an accident, sickness or unemployment. As I revealed here, this is perhaps the most over-priced financial product in the UK, with lenders banking annual profits of a billion pounds from selling these policies. Avoid PPI like the proverbial plague!
Don't get fined for bad behaviour
Consumer watchdog the Office of Fair Trading is investigating the fees which card issuers levy on cardholders who make late payments, miss payments or exceed their credit limits. These can be as high as £30 per slip-up, which is a punitive punishment for a minor offence. To avoid these fines, set up a Direct Debit for at least your minimum monthly repayment, and remember that you have a credit limit, not a target! Also, this article shows you how to go about reclaiming previous fines.
Don't use credit cards to get cash
Almost every credit card charges high rates of interest and steep fees on cash withdrawals. Typically, you can expect to pay annual interest rates on cash of 20%+, plus fees of 2% per withdrawal, minimum £2. Therefore, always use your debit card to withdraw cash, and use your credit cards only for spending and balance transfers.
PART THREE: Other goodies to watch out for
Earn as you spend with a cashback card
If you always pay off your credit cards in full every month, switch to using a cashback card. You'll enjoy up to 59 days' interest-free credit and earn an annual cash rebate of up to £2 for every £100 that you spend. For the record, I earn about £10 a month from my cashback card, which is money for old rope! Note that you can use your cashback card alongside store loyalty cards (such as the Boots Advantage, Nectar and Tesco Clubcard) to earn additional rewards.
Free legal protection
As I explained in this article, when you pay for something costing £100 to £30,000 using a credit card (even if you only pay a small deposit using your card) you get free legal protection which isn't provided by debit cards. Hence, that's why I always use my credit card when buying goods online or from overseas suppliers. If the goods are damaged or don't turn up, or the company goes bust, I can reclaim my loss from my card issuer.
Use the right card overseas
When it comes to spending overseas or paying for goods in a currency other than pounds sterling, you need to choose your card wisely. If you don't, 'currency conversion charges' and other hidden fees can cost you up to £6 for every £100 that you spend on plastic! According to Moneyfacts, the best credit and debit cards to use abroad are issued by Nationwide BS.
Give generously as you shop
By using an affinity or charity card, you can support good causes as you shop. Alas, with the notable exception of the American Express RED card, most cards don't cut the mustard, because they provide low returns to the organisations which they support. On the other hand, with a Best Buy cashback card and the tax benefits available from Gift Aid, you can give hundreds of pounds a year to a good cause of your choosing by flashing your plastic!
Good luck with perfecting your plastic-handling skills!
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