Emma Lunn, Wednesday May 21, 2008
Credit card giants Abbey and Saga have both launched new deals this week boasting the lowest fees and interest charges on the market - but are they the best ones for your needs? Find out how to find the right credit card and keep your monthly repayments down with our five-step guide
This week sees the launch of the new Abbey "zero" card, which charges no fees for balance transfers, foreign exchange or cash advances. It also offers an introductory 0% interest rate on both purchases and balance transfers for six months.
Meanwhile, Saga's new Platinum Visa Card is structured so that after interest and fees, the most expensive debt is cleared first. The card also boasts no foreign currency charges for transactions in Europe, and 0% interest on balance transfers and new purchases for the first six months.
The way different card providers charge interest and fees means that picking the perfect credit card isn't easy and working out the best deal can leave even mathematicians stumped. However, there are a number of things you should look out for which will help you find the right plastic for your needs:
Find a better credit card - fast
1) Interest rates
If you're not going to repay the entire balance every month concentrate on the interest rates
charged. Several cards offer 0% deals for a set period of time and you should favour these cards
over those which promise rewards. Interest payments will almost always outweigh any benefit from
cashback or air miles.
If you need to transfer a balance from an existing store or credit card look for a card with a 0% offer on balance transfers and try to pay off the debt before interest starts being charged. If you intend to spend on the card, look for one with a 0% offer on purchases.
2) Payment hierarchy
The three main types of debt people have on their credit cards - purchases, balance transfers
and cash advances - all attract their own rate of interest, some higher than others. The "payment
hierarchy" dictates which debt will be paid off first. In most cases the cheapest one is paid off
first leaving the debt(s) with higher interest rates accruing more interest.
Suppose you transfer a £2,000 balance to a new credit card with 0% interest for 15 months, but which charges 16.9% APR for purchases. If you then decide to make a £500 purchase, interest will accrue on that transaction until after the £2,000 balance is cleared in full. Over the 15-month deal, the £500 debt will compound at 1.3% a month to £607.
Cards that are structured so you pay off the most expensive debt first include Saga's Platinum Visa Card and Nationwide's Classic Visa card.
3) Cash withdrawals
Although credit card providers like to shout about 0% introductory periods on cards and,
legally, have to display the card's typical APR, they are not so keen to be so upfront about
interest rates on cash withdrawals. These are usually much higher than the rate for purchases -
averaging 23% according to Moneyfacts - with the interest being charged from the day the withdrawal
is made. On top of that you pay 2 to 3% of the amount as an ATM fee.
There is no card which offers a decent way round this card quirk. The best advice is to never use your credit card to withdraw cash unless it's an emergency and you can pay it back quickly.
4) Overseas charges
If you're going to use your card abroad get one that doesn't charge a fee on foreign
transactions. Most charge between 2.75% and 3% each time the card is used abroad. There are some
cards that don't charge a fee - these include those offered by Nationwide Building Society, Saga
and the Post Office.
5) Interest-free days
All cards come with a set amount of interest-free days - normally 56 or 59 days - for
purchases. This gives customers the chance to pay off the debt without incurring any interest.
It's worth checking how many interest-free days a card offers. At the beginning of 2008, the Royal Bank of Scotland - which owns Natwest and Mint - controversially slashed the interest-free period from 56 to 45 days giving customers a window of just a few days between the bill arriving and the payment being due.
A better option is Halifax's One or Plus card or Co-op's "think" card which all come with the maximum 59 interest-free days.
