When is it good to use credit cards?

By Martin Lewis, November 1, 2012

Credit cards are not all bad. The problem is many people think of credit cards as a way to borrow, and that isn’t good. Yet, used right, they are by far the best way to spend. Now is the time to take advantage as Christmas is around the corner, and some plastic gives 5 per cent back on all spending.
Here are the top need-to-knows.

First, neuter the card’s interest-charging ability
Set up a direct debit to repay in full each month. That way you avoid any interest, so it is all profit (also, never withdraw cash, as then you pay interest even when you fully repay). If you are not going to do this, please stop reading now. This isn’t for you.

Use the ‘debit card’ for everything
With the direct debit set up, the credit card is effectively like a debit card that is paid monthly from your bank account. So provided you can always clear in full, use it for all normal spending and possibly expenses, replacing other debit and credit cards, cash and cheques.

5% cashback over xmas and January sales
Capital One’s Aspire pays newbies 5 per cent back for the first 99 days (up to a maximum of £100 in that time). So apply now to get the 5 per cent for the high-spend Christmas and January sales period (fail to repay in full and it is 19.9 per cent representative APR).
After the 5 per cent ends, the rate is “up to 1.25 per cent” depending how much you spend. You need to own a home, have a decent credit score and earnings of over £20,000. If you already have a Capital One card, full best buys are at moneysavingexpert.com/cashbackcards.

Poor credit score?
Most cashback cards require a decent credit score, but if not, you needn’t miss out. The Aqua Reward card offers 3 per cent cashback, up to a maximum of £100 a year. As it is primarily a card to rebuild your credit, even some with past CCJs or defaults can get it. Yet please only do this if you are sure you can afford the repayments, otherwise it is a huge 34.9 per cent rep. APR.

Get big money back on petrol and train fares
The Santander 123 credit card pays a permanent 3 per cent on up to £300 a month on petrol, diesel, rail and Tube spending. You also get 2 per cent on department store spending and and 1 per cent on supermarkets. Though there is nothing on anything outside of that. Combine that with a £2/month fee and this is a card that is only best for heavy drivers/commuters who shop in supermarkets. Still, that is a lot of people. It has another plus too. Unusually, it pays the cashback every month (but fail to repay in full and it is 22.8 per cent APR, including fee).

In a relationship?
Up the gain with a partner. Let me use a true Janet and John example. Imagine Janet applies for a 5 per cent cashback card. She can make John the second cardholder, so he can take advantage too. After the three month higher rate ends, John can then do the reverse for a further three months at 5 per cent. After that both partners should use one card, as cashback rates are tiered.

How is cashback paid?
It is usually taken off the statement annually, so if you owe £400 that month and have £200 cashback, you are charged £200. Most cards do this on the anniversary of when you opened the account — although Capital One does it every January, and Santander does it monthly.

Credit score impact
Every application you make for credit marks your file. One isn’t a problem, but many applications in a short period of time can be damaging. So if you are imminently applying for a more important credit facility, such as a mortgage, it is best to wait until after.

Consumer protection
By law, buy anything from £100 to £30,000 and pay, even in part, on any credit card and Section 75 laws mean the card firm is jointly liable with the retailer for the whole amount. Therefore, if an item is faulty, or the retailer goes bust, go to the card provider for refunds.

Cashback on council tax, mortgages & energy bills
With the Santander 123 bank account (not the credit card) you get 1 per cent back on water, council tax, Santander mortgage payments, and 2 per cent on gas and electricity. It is 3 per cent on mobile, broadband, phone and TV bills. Plus there is tiered interest up to 3 per cent, beating savings. There is a fee of £2 a month (£24 a year), but for many, this is a winner earning £100s a year. Though its customer service rating is far from good. See www.moneysavingexpert.com/bankaccounts.

Last updated: 11:37am, November 1 2012