Choosing a credit card
Having a credit card can be very useful. They can act as a backup, especially in an emergency, and some people like to use them to spread the cost of a busy month or two. But because they charge pretty high interest, credit cards can also be an expensive way to spend. That’s why some people can end up with a debt that they struggle to manage. It’s one of the reasons that it’s important to spend time deciding which credit card is best for you.
There are eight different types of credit cards that you can check out with comparethemarket.com –from zero percent balance transfer credit cards or cashback cards, through to low APR cards and cards from your own bank. This guide will explain the different kinds to help you understand which might suit you best.
How credit cards work
But let’s quickly go back to basics and talk about how credit cards work.
Not everyone can get a credit card. If you have been in debt in the past, or if you’re young with not much financial history, it might take you a while to find a provider that will accept you. Once you’ve found one, you’ll be sent a card that you can use in many shops, restaurants and other businesses around the world. You’ll be set a limit on your spending and receive a bill each month.
If you pay off the full balance of the card each month, you shouldn’t pay interest (subject to exclusions and terms of your card). But if you can only afford to make a smaller payment (you have to meet a minimum confirmed by the provider) you will have to pay interest on the balance left on the card.
Check the APR
The APR helps you understand how much it could cost you to use the card. The APR rate is one way to compare how much using a credit card will cost. So if the APR on a card is 17 per cent and you spend £1,000 on it, the interest and charges will mean that you are spending £170 on top of your debt. In the end, then, you will be paying back £1,170. Don’t forget there are other types of fees to take into account such as balance transfer fees or late payment charges.
Our credit cards page shows you the main eight kinds of credit cards. Let’s look at each of these in turn.
The first kind are known as zero percent balance transfer credit cards. They could be useful if you have a credit card already and are being charged a lot of interest on the balance that’s outstanding. Once you’ve done your zero percent balance transfers the new card will not charge you interest on the amount you transfer for a set period of time, say 12 or 24 months. However, it’s worth noting that most cards will have a balance transfer fee that will be applied when you move the balance over.
There’s a second sort of zero percent credit card, which won’t charge you interest on what you spend for a set amount of time. After that point you will start being charged interest, so if you do run up a debt on the card it could become expensive.
Other zero rate credit cards may offer you both of those things – zero percent balance transfers and also offering zero interest on your spending. You need to check the details carefully so that you know exactly how long the offers last for, and there may be other terms and conditions.
Rewards and cashback
The next two kinds of cards work differently. Rewards cards and cashback cards will both give you something back for spending money on the card. You might gain loyalty card points or travel points (like Avios), or receive money off your credit card bill, depending on how much you use the card each month.
These cards often have high APRs, so they are best suited to people that usually pay the full balance on the card every month. If not, the interest you owe will probably be more than the value gained in your rewards. It’s unusual to find a zero percent balance transfer offer for these cards.
Low APR cards
If you don’t pay your balance every month, the final kind of card could be useful. Low APR credit cards cost a lot less to use in charges and interest. Typical zero percent interest credit cards and rewards cards might have an APR of 15-25 per cent, while a low APR card might offer somewhere between 6 and 15 per cent. Zero interest credit card offers are sometimes available with this kind of card.
Cards from your bank and credit builders
There are two final kinds of card that we haven’t talked about – cards from your bank, and cards that build credit.
If you get a card from your own bank, they know you and your history, and so might give you more credit than you get elsewhere.
Meanwhile, if you have previously been turned down for a credit card, there are certain cards that help you improve your credit score and open you up to other card options in the future. These will offer low limits, but as long as you stay within them and pay regularly, you’ll build up your credit rating for the future.
Do bear in mind that if you’re asking yourself “which credit card is right for me?” one way of safe spending is to not have a credit card at all. But we know that zero credit cards and others mentioned above provide people with a convenient way to buy. So use comparethemarket.com to help find the best credit cards for you, whether it’s one offering zero balance transfers or something totally different.