With a mind-boggling array of credit cards currently available, choosing the right one can seem a daunting prospect. Whether you are looking to ease your debt burden with a 0% balance transfer deal, get more for your money with a cash back card, get additional purchase protection when spending, or improve your credit rating with a credit building card, the UK credit card market has it all.
Of course, if used sensibly, any credit card can be an incredibly powerful financial tool. However, you can (and should) maximise the benefit your card offer by getting the right deal for you.
Before choosing a credit card, there are a few things you should consider:
How good is your credit score?
As with all forms of borrowing, credit card applications require a credit check. A credit check is performed by the lender so they can understand your credit history and current commitments. They do this by looking at your repayment history, current credit agreements, your degree of credit utilisation (how much of your available credit you use) and so on.
Only people with blemish-free credit reports will be offered market-leading deals, so it is important that you are aware of your score before applying. This prevents unnecessary rejections and the black marks they leave on your credit file which make it harder to obtain credit elsewhere.
NB. Many issuers now offer a ‘soft-search’ tool which checks your eligibility for cards. This does not affect your credit rating and helps to minimise unnecessary 'full' applications.
There are three main UK credit reference agencies, Experian, Equifax and CallCredit. Individuals can get a copy of their credit report for a maximum fee of £2, or they can sign up for an online account. The first two offer a free one-month trial, but cost £14.99 and £14.95 a month respectively after that, whereas Noddle (from CallCredit) is free for life.
How do you intend to use your credit card?
Once you're aware of your credit score and the cards you are more likely to be accepted for, you will be able to narrow down the market choice. However, you will still need to think about how you intend to use the credit card in the immediate future and beyond.
For example, if you have a high existing credit card balance you wish to pay off, and plan to make no purchases, a balance transfer card could help, whereas, if you plan to make purchases (and gain Section 75 protection), you may be more suited to a 0% purchase card. High spenders who repay in full each month can benefit greatly from cashback and reward cards, while someone with a low credit score might need to start with a credit-builder credit card.
Getting the best deal on a credit card depends on your circumstances. While 0% purchase interest for 12 months might sound great, if you're only paying back existing debt, the benefit is useless.
Types of credit cards
There is no ‘one card fits all’ with credit cards. Different types suit different people’s needs and requirements. Below we reviewed some of the most popular credit card types, and who they are most suitable for.
0% balance transfer cards
Balance transfer cards enable card holders to move a debt(s) from their existing card(s) to one offering 0% interest on the amount transferred for a specified period.
Balance transfer cards are useful because your minimum monthly payments (which you pay on all credit cards) are used to clear your debt, instead of servicing interest payments. You can, therefore, reduce your cost of borrowing considerably, and speed up the rate at which you repay your debt.
For example, if you have a £5,000 balance on one card with 18.9% APR and £2,000 on a store card with 34.9% APR, you could transfer the whole £7,000 debt on to a 0% balance transfer card and pay no interest whatsoever for the introductory period.
A couple of things to bear in mind though – Firstly, you'll only be able to transfer a proportion (usually around 90%- 95%) of your credit limit, so it is important to work out the entire amount of your debt, to ensure that you can move it all at once. If you can't, transfer the most expensive debt first, to get the maximum benefit. Secondly, most issuers require balance transfers to be complete within a limited time frame (typically 60 days from account opening).
Some balance transfer cards also offer 0% on purchases. 0% purchases tend to be for much shorter periods than the balance transfers (unless you choose a balance transfer and purchase card – more about these further down the page), and once this period expires, you incur standard APR interest rate on your purchase debts. With this in mind, it can make sense to keep a separate card for spending.
Watch out for: The APR at the end of the introductory interest-free transfer period
Who do they suit? People with existing credit card debt, who want to repay their debt quicker and reduce their interest payments
Things to consider:
0% purchase cards
0% purchase cards enable you to spend without worrying about rolling some of your balance forward every month (for a set period). These cards can be particularly useful for spreading the cost of expensive items over a number of months, but it is very important to pay off the balance in full once your promotional period end, as the standard APR will be applied to the remaining balance.
Watch out for: The standard APR at the end of the introductory interest-free purchase period.
Who do they suit? People who need to spend immediately, but prefer to spread debt payments over a number of months at 0% interest.
Things to consider:
Balance transfer & purchase cards
Balance transfer and purchase cards offer the flexibility of both 0% balance transfer cards and 0% purchase card, although the duration of both is lower than the market leading rates for either individual category.
If you want to transfer an existing debt but need to purchase too, these cards are probably what you need.
Most transfer & purchase cards offer equal length introductory durations, but this is not always the case, so it is always best to check the duration of each, and ensure the combinations work for you.
Watch out for: The standard APR, which is incurred at the end of each introductory period
Who do they suit? People who want the flexibility to transfer existing debt and enjoy 0% purchase simultaneously
Things to consider:
Cashback & reward cards
Cashback and reward cards can make credit card shopping very rewarding. However, they usually have comparatively high-interest, and some charge an annual fee, so they are best suited to people who spend a great deal, but pay off their balance every month.
Watch out for: Charges incurred through high interest could outweigh the value of rewards gained.
Who do they suit? People who spend and repay full every month.
Things to consider:
Credit building credit cards
If you have bad or limited credit, you can find yourself in a credit catch-22. You can't get credit because your credit rating is too low, but you can't increase your credit rating without access to credit.
Credit building cards offer a useful financial lifeline. Their eligibility criteria and credit limits are lower than conventional cards, so they are more freely available. And, if used well, they can help rebuild a good credit history, as issuers report your (good) financial activities back to the credit reference agencies.
Of course, because these lenders face an increased risk of bad-debt, the interest charged on these cards is higher than standard credit cards.
Watch out for: High APRs can quickly increase even small unpaid balances
Who do they suit? People not eligible for standard credit cards because they need to improve their credit rating
Things to consider: