Credit Cards

Credit cards are a great invention. They are an excellent way to manage money in the short term: but they are a terrible way to take on debt in the long term. Used carefully they are a financial planning aid: used foolishly they pave the road to ruin.

Like many other financial products there is a tremendous competition among credit card providers. They want your business and there are special deals for new customers that are very good news. You can pay nothing for debt for nine months; you can pay a low rate of interest until the debt is paid off; or you can get paid every time you use your card. You cannot get all this at once, however. You must play the market and remember the first rule of financial services in the 21st Century – loyalty is punished, disloyalty is rewarded.

If you have credit or store cards you should check what deal you are getting. Whether you run up debts or pay it all off at once, you could lose out if you do not play the field and swap cards from time to time. You have to be well-organised with all these deals, however, and make sure that you don’t lose track of what you are doing and when you must change. If you are not well-organised, don’t do anything which relies on getting the timing spot on.

Short-term debt

If you do not pay off your card in full each month, then you should make sure you are not paying through the nose. Store cards can charge you 30 per cent a year for borrowing money. In other words, if you have £1,000 credit on the card it will cost you £300 a year (£6 a week). Even if you pay it off in a regular manner, you will end up paying £150 for the privilege of borrowing it. Credit cards that are not linked to a particular store or chain are better – but at their worst you can be paying more than 20 per cent on your debt. Few charge less than 10 per cent and even the best will charge you 8 per cent, which is twice the Bank of England base rate. These rates are alright for short-term debt – a few months to spread the load or buying something you need or want – but they are not good if you allow the debt to linger longer.

Long-term debt

Although credit cards are generally a mistake for long-term debt, you can find long-term debt deals that are really worth having. Many cards allow new customers to transfer debt – either from another card or from a bank overdraft – to that card. Suppose you have £5,000 of debt on other cards that you really cannot see your way to paying. You can find a card that offers you a fixed rate for the life of the debt. They are called ‘life of balance’ deals and they mean that the debt is charged at a low rate until it is paid off. It is currently possible to get less than 4 per cent on life of balance deals. Pay the minimum each month and you can watch the debt run down. It will take around 13 years to repay it but for all that time the interest rates are low.