Credit Cards – How to Choose

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What type of credit card is best for me?

To answer that question, you first need to decide what you’re going to primarily use it for.

You can use your credit card for one of three things – to move the money you owe on another card to your new card, to purchase goods and services and to take out money from an ATM.

Although you’ll do all this using the same card, you’ll be charged a different level of interest for each type of use. You’ll find that the debt with the lowest rate of interest on it will be paid off first, that way companies can keep adding the higher interest to your remaining balance.

For example, you move £1100 from one card – this is called a balance transfer – buy something on your credit card for £600 and take out £250 from a cash machine.

Altogether, you have £1950 worth of debt to pay off on your card. Of course, there’s little chance of you paying that all off in one go, so you’ll need to work out how much you can afford to repay. Say you decide you can pay £200 each month.

You may think you’ll just be chipping away at the £1950, but what you are really doing is paying off each of the three amounts, starting with the one with the lowest interest on it. The balance transfer may have a rate of 4%, the purchase 15% and the cash advance, 26%.

Every time you pay your £200, it will come off the £1100 balance transfer first and then the purchase of £600. That means, by the time it comes round to the paying off the cash withdrawal of £250, you’ll find that the interest of 26% means the amount you pay back will be considerably more than you borrowed.

Be a card shark, it’ll be to your credit

If you really want to take control of your finances, you can avoid spiralling credit card costs by using a number of cards for each of those different functions.

Few providers charge annual fees for their cards, so you can have one for purchases and one for balance transfers without having to fork out an added charge each year. That way you’ll maximise the benefit of each card at the minimum cost to you.

However, it’s not really advisable to whip out some wonga from a cash machine with your credit card. For a start, the interest rates for cash advances are usually ridiculously high. Also, unlike purchases and balance transfer, there’s no chance of your card provider offering a 0% interest deal on cash withdrawals.

And if you’re still not convinced about the folly of using your card to grab a quick quid, or ten, from the hole in the wall, remember that interest on cash will be calculated from the day you take the money out. That means that even if you do clear your balance each month, the interest will still be added on.

Honesty, the best credit card policy

So, you can’t say you haven’t been warned. Credit cards can be pretty expensive if you don’t manage your money properly.

Luckily, companies have been forced to be more up front about their fees and charges, so when you come to compare credit card deals, you’ll be able to make an informed decision.

Credit card providers must supply you with a round up of the key features in what’s known as an honesty box which you should see on any literature connected with the card you are considering, so make sure you take notice of this and read the small print before signing on the dotted line!

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