How to use credit cards to deal with your debt

Various types of credit card – including balance transfer and zero-interest – make owing money much less expensive, says Ruth Jackson Kirby.

Did you run up some debts at Christmas? According to National Debt Advice, a third of us borrow money to pay for Christmas gifts, while a fifth of us use credit  to finance Christmas food. 

If you have debt on a credit card that you can’t pay off, it can be moved onto a balance-transfer credit card. These cards offer a 0% introductory period, which means you won’t pay any interest on balances you transfer from other credit cards for that length of time. 

When comparing balance-transfer credit cards there are two things to look at: the length of the interest-free period and what the balance transfer fee is. You then need to balance these two elements to find the cheapest card for you.

For example, the longest 0% balance transfer deal currently available is 29 months from Sainsbury’s Bank, but it comes with a balance transfer fee of up to 4%. On a £1,000 debt that means paying £40 to transfer your balance. 

If you have a very large debt and will need over two years to clear it, then the 4% fee may be worth it. However, if you don’t need that long to pay off your credit card look for a card with a shorter 0% period and a lower balance-transfer fee. For example, Santander’s All in One credit card offers an interest-free period of 26 months for balance transfers with no transfer fee at all. 

Anyone who has built up debt through a personal loan or overdraft can move it onto an interest-free credit card. To do so you need to apply for a money-transfer credit card. MBNA currently offers a 14-month interest-free money-transfer credit card with a 3.49% fee. 

When you need to make a big purchase, it is a good idea to put it on a credit card, even if you could afford to buy the item out of savings. That’s because credit cards give you extra protection through Section 75 of the Consumer Credit Act. 

Buy anything worth between £100 and £30,000 and, if the purchase goes wrong, you can get a refund from your credit-card provider if you can’t get one from the retailer.

If you also want to spread the cost of the item, opt for a credit card with an interest-free period on purchases. Both Virgin Money and Sainsbury’s Bank are offering 20 months at 0% on purchases with their credit cards. 

Be aware with any credit card that has an introductory interest-free period – it may not cover everything and when it runs out the interest rate will rocket. For instance, spend on the Sainsbury’s Bank balance-transfer card and you’ll pay a 21.95% annual percentage rate (APR) of interest.

If you pay off your credit-card balance in full each month then you won’t need to worry about paying interest – in which case, you may want to consider a cashback-credit card. Virgin Money has launched a new Money Back scheme that allows its credit-card customers to earn up to 15% cashback on some purchases. 

Customers need to sign up to the scheme; then they will be sent personalised money-back offers. Alternatively, the American Express Platinum Everyday cashback card pays 5% for the first three months then 1% (or 1.25% if you pay a £25 annual fee) on all your purchases.

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