Credit cards could be more beneficial than you think. Provided you neuter their borrowing ability, for many, credit cards are by far the best way to spend.
Not only do you get extra consumer protection but get the right ones - cashback cards - and you get paid to use them. Better still, now is the perfect time to grab one as you can get a lot of cashback over the next couple of months. Here are my 10 cashback card need-to-knows:
1. They get paid when you spend - claw it back
Retailers are charged 1.5 to three per cent of your spend when you pay by card. Cashback credit cards effectively put this amount, tax-free, in your pocket, in the hope of tempting you to spend so they can then charge interest. Yet the savvy can earn at no cost.
2. Always repay in FULL by direct debit
This is the golden rule and your way to emasculate the plastic and stop it charging you any interest (usually around 20 per cent APR), which would dwarf the cashback. The best way is to use a direct debit to ensure you never forget and ruin it all. Most cards list this option on forms. If not, call and ask. But never withdraw cash from ATMs - you will often be charged a fee and even if you pay the card off in full you will usually be charged heavy interest.
3. It is now effectively a DEBIT card that pays you - use it for everything
As the direct debit takes care of the 'borrowing' aspect of the credit card, it is now far more like a debit card as it is paid from your bank each month. Use it for all normal daily spending replacing cash, cheques and other plastic. It is also not a bad budgeting technique as you see your months total expenditure in one go. And if your employer allows, put expenses on it too if you can always clear in full.
4. Five per cent cashback for the next three months
Capital One's World Mastercard is currently paying newbies five per cent for the first 99 days. After that rates are tiered up to 1.25 per cent. You must have a good credit score, earn over £20,000 and own your home to qualify. Fail to fully repay and you will be charged 19.9 per cent representative APR. More info at www.moneysavingexpert.com/cashback
5. Five per cent on Xmas and January sales
Apply now and for Capital One, the accelerated cashback covers the higher-spend Christmas and January sales periods. If you have a big ticket item due it is better to hold off to maximise the cashback for that (though there is no guarantee the deal will still be around).
6. Team up with your partner and up the gain
Those in trusting relationships can maximise the gain on the card. For example, with Capital One, Janet applies making John the second cardholder, so both can spend and get five per cent cashback. Once the introduction deal ends, John applies and does the same to bag a further five per cent. After that, they both use Janet's card as cashback rates are tiered.
7. Three per cent back on all petrol spending
Someone filling up a typical size tank each week spends £3,500 a year on petrol. It is by far the biggest single item people use plastic for. No wonder a wave of petrol cashback cards are tapping in.
Santander pays three per cent cashback on fuel spend up to £300 a month, two per cent at department stores and one per cent in supermarkets. There is a £24 annual fee, so make sure you use it enough to at least cover that. A family spending £60 a week filling up and £150 on food would make £150 a year (and that is after the fee).
To qualify you must earn over £7,500 and pass a credit score. Fail to fully repay and it is 18.9 per cent representative APR. More options at www.moneysavingexpert.com/petrol
8. Impact on credit score
Every application for any product marks your credit file. One application has a very limited impact, though lots in a short time can be a major hit.
So it is always best to prioritise applications in order of importance, ie: mortgage first, then shift existing debts to a 0 per cent balance transfer. Cashback cards come after in that hierarchy.
9. Free protection on your purchases too
All credit cards, including cashback ones, have one over on debit cards. Spend between £100 and £30,000 on them and Section 75 laws mean the card company is jointly liable with the retailer. So if an item is faulty, or the company goes kaput before delivery, you can get your money back.
This applies even if you only paid a deposit on the card. Buy a £3,000 television and pay just 10 pence on the credit card and the card company is liable for the whole £3,000.
10. Earn £100s a year
If you do all spending on the card and pay off the balance in full by direct debit it is easy to hit big amounts. Spend £5,000 on Capital One and you would earn £80 in year one. Spend £10,000 and it is £145. £20,000 is £230. All this just for changing the plastic you use.