At this time of year, credit cards can feel like a millstone around your neck. Christmas bills are arriving and you’re wondering how you could possibly have spent that much. But a credit card can be a very useful tool and not just a painful reminder that your generosity can sometimes extend a little too far. Making your card work harder comes down to one basic question: do you tend to pay off your bill in full each month? If so, you need to choose a card offering rewards. If not, then you can still free up more money by changing when and how you pay your bill.
Let’s start with those rewards. There are basically two types: gifts and cash. Gifts tend to be worth more, but only if you use them. Billions of pounds of rewards remain uncollected on credit card and store loyalty schemes.Cash, on the other hand, is dished out annually as a credit on your account.The best cash scheme is probably American Express Platinum Cashback Everyday card. This gives 5 per cent on everything you buy for three months on up to £2,000 of purchases — so a maximum £100 reward.
After this you’ll earn 0.5 per cent on the first £3,500 spent each year, 1 per cent on the next £4,000 and 1.25 per cent on any spending above this.Santander 123 is mind-bogglingly complicated, but basically gives between 1 per cent and 3 per cent cashback on certain types of spending such as supermarkets, department stores and transport. However, there is a £3 monthly fee to take the shine off those rewards.
Nationwide current account holders can get 0.5 per cent cashback on its Select Credit card as long as they pay £750 a month into their current account. Some store cards, such as Marks & Spencer and John Lewis, automatically send vouchers to be spent in store. Sainsbury’s Bank Nectar card occasionally boosts the value of the rewards for spending on specific items.
Tesco’s Clubcard credit card is a decent option if you prefer to shop there, or there’s the Asda Money card. Airline schemes are generally popular ways to earn rewards. But make sure you can use them as reward flights tend to sell out very quickly in school holidays. Virgin Atlantic’s range is run by MBNA, offering points towards flights.
There are also American Express cards providing Avios points towards BA flights. The key with any of these cards is to put every possible spending on them, right down to your morning latte, and then pay it off in full each month by direct debit, otherwise the interest will far outweigh the value of the rewards.
There are other ways to make your money stretch further with a credit card. Potentially the most lucrative are those that don’t charge a mark-up when you use them abroad.Most cards take commission from the exchange rate when converting your spending back to sterling. This can effectively add between 3 per cent and 5 per cent to your holiday spending.
Cards that don’t make this charge include Post Office Platinum, Halifax Clarity, MBNA Everyday Plus American Express, Creation Everyday and Nationwide Select for current account customers.So what if you’re a consistent borrower? In this case, your aim should be to pay as little interest as possible.
One option is to move your balance to a card with a long interest-free period. You’ll be charged a fee for doing this, but it’s still cheaper than paying interest each month.However, this option is not open to everyone and many people find themselves rejected because they fail the credit score test.
Find that you’re just not making progress on your debt, no matter how hard you try? If that’s the case, you might be facing overwhelming debt. To break free of this financial burden, look into your debt relief options. These tools can change the terms or amount of your debt so you can get back on your feet more quickly.
The alternative is to pay as much as you can as soon as you can.Most people pay far more interest than they need to.When you receive your statement there will be a payment due date. This is usually two to three weeks after you receive your statement and it’s the date the direct debit is taken if you have one set up.
But you will be charged extra interest on every one of those days. So make your payment on the day you receive the statement. You could set up a standing order to pay the same amount each month — but make sure this is more than the minimum required.There’s nothing to stop you making more than one payment a month if some spare cash comes up, which will reduce your balance still further.
Let’s take a card charging 18.9 per cent that demands a minimum repayment of £5 or 1 per cent of the balance each month. If you owe £2,000 and just repay the minimum, you’ll eventually pay £2,718 interest and take 24 years and three months to clear the debt.
If, on the other hand, you repaid a fixed £50 per month, you would pay £1,017 interest and clear the debt in five years and one month. Paying £100 per month would clear the debt in two years and leave you paying just £381 interest.