The two credit card changes you need to know about

Despite rock-bottom base rates, the interest charged on credit card balances continues to rise. But new government rules could mean lower payments for some customers. Ruth Jackson explains what is going on, and picks the best cards to choose to ensure you're not paying over the odds.

There are big changes underway in the credit card world. That might be all you need to hear to stop reading right now. But you shouldn't: they could and probably should change the way you need to use your card.

Pay more, get the same

Despite the fact that the Bank of England's base rate hasn't budged from 0.5% for 16 months, the standard payment rates on credit cards have been steadily rising. This month, Barclaycard was the latest in a long line of companies to announce an increase in its rates. The average purchase rate now? A shockingly high 18.8% APR. That's over 35 times the base rate. This makes sense to the banks they need to up their profits to cover the losses they have made over the last few years. But that doesn't necessarily mean you should let them use you to do so.

If you pay your balance off in full, on time each month, you shouldn't accrue any interest on your credit card, so it doesn't matter what the rate is. But if you don't, checking your rate and getting the best one you can is more vital than ever. Either go for one of the 0% introductory offers mentioned below or, if you can't be bothered to get a new credit card every time the introductory offer runs out, get a low standard-rate card instead and stick with it the best of the bunch at present is Barclaycard's Platinum Simplicity which offers 6.8%APR.

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Pay less, get the same

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The good news is that the government has been cracking down on a couple of the banks' most sneaky tricks. So from January 2011 the way our payments are allocated to our debts will be reversed for most of us (Nationwide and Saga already use the government-approved method).

The phrase 'payment hierarchy' refers to the way in which you pay off your debt. A negative hierarchy means that you pay off the debt earning the least interest first.

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So, say you have a 0% balance-transfer deal and transfer £1,000 on to the card. Say the card has a rate of 18% for new purchases. If you then buy a £100 pair of shoes, every payment you make goes towards the £1,000 balance transfer at 0%. The £100 for the shoes sits earning 18% interest until you have paid off the original £1,000.

The government has ordered credit card companies to switch to positive payment hierarchies from January 2011. This means that in future your payments will always go to pay off the debt incurring the most interest first. Even better news comes with the fact that several credit card companies are making the changes early. MBNA, who operate credit cards for Virgin, the AA and several charities alongside their own cards, have announced that they will make the changes from September. For those who use their credit cards a lot, this should mean less faffing around with different cards.

That said, if you want the best deals out there you will still need to keep your balance transfer and new purchasing cards separate. For example, the best balance transfer cards available at the moment are Barclaycard Platinum with Balance Transfer, NatWest Platinum and Royal Bank of Scotland Platinum. They all offer 0% for 15 months on balance transfers with a 2.9% fee. But the interest rate on purchases is 16.9% APR. If you only make a small purchase on the card and cover it in the next month's repayment then you won't accrue any interest. But make a big purchase you can't cover straight away and you'll find you pay a lot of interest.

Instead, you could get a separate credit card for your purchases perhaps Sainsbury's Credit Card, Barclaycard Platinum with Purchase, Tesco Clubcard Credit Card or the Virgin Credit Card. All of those come with 0% interest on purchases for the first 12 months. Just make sure you get a new card when the 12 months are up otherwise you'll find yourself paying through the nose if you don't clear your balance each month.

If you do pay off your balance in full each month go for a card that rewards your good spending habits such as the American Express Platinum Cashback card. This gives cash back of up to 5% in the first three months, then up to 1.25% after that.

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Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping, among many other titles both online and offline.