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Credit cards could be described as both a blessing and a curse. On one hand they offer a way of coping with a big expense if you don’t have a healthy savings account to raid.
On the other, credit cards can be a very expensive - and all-too-easy - way to borrow, often resulting in big debts.
Presents, decorations, food, wine and countless nights out around Christmas soon take their toll on your bank balance. But if you are smart about spending, it’s very easy to use credit cards to your advantage.
You may have heard that borrowing on credit cards is getting more expensive. Indeed, the average interest rate on credit cards has risen pretty consistently over the past 11 years, rising from 15.9% in 2006 to 23% now, according to Moneyfacts.
But there is a way to ensure you don’t pay a penny in interest. Purchase credit cards offer an interest-free period on spending - handy over Christmas and any other times when you have big expenses on the horizon. According to Moneyfacts, you can get a card offering 0% for 31 months from Sainsbury’s Bank. The key to using this card to its full advantage is to make sure you pay back the balance before the 0% period expires. Otherwise you risk adding to your debt and paying more money in the long run.
There is another handy aspect to using credit cards. Under Section 75 of the Consumer Credit Act, if you pay for something costing between £100 and £30,000 on a credit card, the provider is equally liable if something goes wrong. If a business you've paid doesn't do what they are meant to do, you can claim from your credit card company.
However, it’s key to remember not to overspend on your credit card. Spend to your own limit - which doesn’t have to be as much as the bank sets. Check your statement regularly. It’s astounding how spending bits and pieces here and there can really add up. Keeping a watchful eye on your balance helps you to manage your money.
There are credit cards to suit other kinds of borrowers. If you’re in the fortunate position of being able to clear the balance every month, you can use cards that offer rewards, where you earn points that can be traded in for days out, hotel stays and even flights. There are also cards that pay cashback on your spending. You get an annual credit on to the card which can help go towards day-to-day expenses - or you could use it to treat yourself.
Whatever kind of card you use this Christmas, you need to play by the rules. The bank can take away the 0% offer if you miss a payment, leaving you with hefty interest charges on your balance.
It is also easy to damage your credit rating if you don’t pay your bills on time. Never missing a payment will result in a squeaky clean credit report. This means that lenders are more likely to give you preferential rates on other products, like loans or mortgages, because they view you as a responsible borrower.
There are other traps to bear in mind. Never take cash out on a credit card. Most credit cards charge a fee when you withdraw cash as well as interest. And the interest charged on cash advances is different to when you make a purchase on your card. You will be charged interest on the amount you withdraw from the day you take it out until you pay off the balance. Whereas with most purchases you will not be charged interest unless you do not pay your bill in full when it arrives, sometimes up to 56 days later.
Remember - if you want a new card for your Christmas spending, you will need to apply soon. It could take a couple of weeks in some cases to get a new card through where you need to prove identity and for your application to be processed. All banks differ - but just make sure you apply well in advance.
To work out the best for you, read our guide to your credit card options - https://protected.fscs.org.uk/banking/how-to-use-credit-cards/
Once you have decided on the type for you - find the right card at https://moneyfacts.co.uk/credit-cards/best-credit-cards/
Already in debt on a credit card?
Certain credit cards enable you to get existing debts cleared faster. A 0% balance transfer card offers the chance to move a balance from another card with no interest to pay for a fixed period. Nuba, the credit card provider is currently offering a 0% period of 39 months. However, watch out for “transfer fees”. Nuba is charging a hefty 3.49%. By choosing the MBNA Platinum card you can save money on the fee. It offers a slightly shorter period of 38 months and the fee is just 1.49%.
Crucially, you must remember to pay off the balance by the end of the term. Put a reminder in your diary in advance so you can transfer the remaining debt if you need to, before interest charges start being applied.
The Money Advice Service also provides much useful information on credit cards and managing debt, including a handy credit card calculator to help you work out how quickly you can pay off your cards.