Credit cards can be confusing, so which credit card type is best for you? MoneyMagpie Editor and financial expert Vicky Parry explains your choices
Credit cards can be very handy things. Even if you can afford purchases from your current account, there are reasons to open a credit card. It builds your credit score, it provides extra protection against bad purchases, and can even give you some great rewards. But there are pitfalls of credit cards, too. Let’s take a look at how they work.
Choosing your credit limit
Before we get started, the main thing to remember for all of these types of credit card (except balance transfer – more on that later) is that you need to pay your card off in full each month to make the most of it. Sometimes, you might use a card to buy a particularly large purchase like a sofa, which can take a few months to pay off. Make sure you clear your balance as quickly as possible, because it will stop interest charges rinsing your bank account.
This is why it’s a good idea to choose the lowest credit limit you need. You might be offered a card with an £8000 limit – but if you know that means you’d be tempted to just make £8000 worth of purchases, think twice. Lowering your limit to an affordable amount means you won’t get trapped into a debt spiral.
Purchase credit cards
The majority of credit cards are for purchases. You can also withdraw cash (at a high charge) or balance transfer from another card (at a charge), but the main use for them is to buy things.
It’s particularly useful to use a credit card for purchases over the value of £100, because this gives you added consumer protection. If something goes wrong with a purchase, your credit card company could be liable for refunding a purchase should the retailer not do so.
Purchase credit cards are ideal for building credit, if you pay off the full balance each month. Many people use them on a certain type of purchase, such as for their monthly fuel or grocery costs, so it’s easy to manage payments and build credit. It can also be useful if you need to purchase something but have a few weeks between the need and your next payday: you can make a purchase on a credit card and not need to pay it back until the next month, giving you some breathing space.
Reward credit cards
Reward cards are exactly as they sound: they give you benefits for using them. The type of reward can vary a lot – a supermarket bank card like Tesco could give you Clubcard points, an Avios card could earn airmiles, and some give you cashback each month.
Reward credit cards can be useful if you need the reward. For example, if you are saving up for a holiday, a reward card that earns airmiles such as a Virgin credit card could help you earn enough points over a year of spending to significantly reduce the cost of your trip. Reward cards sometimes come with a cost, however. There can be a monthly or annual charge, so your earning of rewards needs to outweigh the cost of having the card. They are also often not available for people with poor or low credit scores.
Balance transfer credit cards
A balance transfer card lets you take your other credit card debt and put it onto one card. This is usually with a lower or even 0% interest rate for a set period of time.
Balance transfer cards are ideal if you have built up some credit card debt and are struggling to keep up with your interest payments. Transferring the balance from your previous card to your balance transfer card may incur a small fee, but will save a lot on monthly interest. Some cards will have a 0% balance transfer offer, allowing you a period to transfer from previous cards without a fee. The best ones (currently Natwest is a good example) offer a 0% balance transfer fee AND a long 0% interest period on balance transfers.
You can use your balance transfer card to make purchases, but beware: the interest accrues from the day of purchase (not statement date) and can be very high. It’s best to use these cards as a debt consolidation technique.
Choosing a credit card
Which credit card you need depends on your personal circumstances. If you need to build yoru credit, a small limit purchase card would be ideal; to help get out of debt, a balance transfer card would be suitable.
You can often do a ‘soft search’ on credit reference sites like Credit Karma to find out which credit cards you’re eligible for, without a hard search on your credit report. This is good, because if you’re denied a credit card that will ding your score further. Finding out in advance your likelihood of being accepted can be a good step towards improving your credit score, rather than damaging it.
The golden rule
Whatever type of card you choose, remember the golden rule: pay it off in full every month, or as much as you possibly can. And when you’ve cleared your balance, it might seem to make the most sense to close the card. However, this will slash the amount of credit available to you – which means, in the eyes of credit reference agencies, you’re actually facing a declining credit score. Keep your card open for a while, even if not in use, to help stabilise your score.
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