How to pay nothing for the benefits of a credit card
Monday, 28 February 2011 09:51
By Kate Saines
Our credit cards have come in for a bit of a hammering recently – in more ways than one.
Using them to buy everything from a packet of mints in the local petrol station to the holiday of a lifetime in Disneyland has plunged too many people who couldn't afford the interest rates into a steaming quagmire of debt.
But credit cards need not be the evil enemy they sometimes appear. They can provide us with a way of borrowing money at rock bottom interest rates, they can help us improve our credit rating and they can even earn us money.
The trick is to make sure we use them in the right way – and there is a technique to this. Here are a few ways to benefit from credit cards, without paying a penny.
Earn some rewards
Forget building up debt, use a bit of this 'financial savvy' we are always hearing about and you could build up airmiles, supermarket reward points, cashback or even a holiday.
Scour the credit card market and you will find an array of credit cards offering rewards in a bid to lure in customers. They all work in similar ways – basically, every time you spend you'll receive points which translate into rewards, which can eventually be redeemed.
Classic examples include supermarket credit cards which are linked to loyalty cards. Tesco and Sainsbury's both have a credit card version of their Clubcard and Nectar cards respectively.
American Express is a key player in this market, and is currently offering five per cent cash back in the first three months up to £100, and 1.25 per cent cash back thereafter on its Platinum card.
Read more: Cashback credit cards and consumer savings
Lloyds TSB, meanwhile, is offering one air mile for every £10 you spend with the Airmile Duo American Express card and one airmile for every £50 spent using the airmiles duo Mastercard.
Critics argue it takes ages to build up these points, because you get little in return for your spending. But provided you choose a card which suits your spending pattern, you will find the task a little less onerous.
If you love travelling, for example, you would benefit most from a card which offers airmiles. Or you could make sure you always pay for your holidays on your card, as big purchases will boost your points.
Chris Griffiths, head of credit cards at Confused.com, reckons you could pocket £67.50 by paying for your holiday using the right card.
"If you've been saving hard and have the cash ready to pay for your holiday it's worth considering using a reward credit card to earn yourself some additional cashback or airmiles towards another holiday," he said.
"A one-week skiing holiday in Courcheval, France, for example, could earn £67.50 in cashback."
He said that any purchase exceeding £100 will be covered by section 75 of the consumer credit act, so the credit card company will cover should anything go wrong with the booking.
Richard Titheradge, from Swindon, has redeemed three week-long stays at Marriott hotels in Dubai, the US Virgin Islands and Orlando, USA after collecting a healthy stockpile of points on his credit card.
It has taken him six years of spending to build up the points and reap these rewards on his Marriot Rewards Platinum Visa, and he admits he often uses the card more than he would if it was a mainstream non-reward card.
"I generally find I use the card as much as possible just because it gives me the points, especially if I am buying expensive items for work. I always put flights, hotels, petrol etc on it," he said.
Richard, who is the technical director of IT firm, Intuitive Systems and Networks, still thinks the benefits are worth the effort, especially as he uses the card for work.
He added: "I have found using a rewards credit card particularly useful as it gives me the benefits of a credit card such as buyer protection when performing online transactions, and the ability to delay payment for a few weeks, which is particularly useful for business expenses which are reimbursed monthly.
"It also delivers something back to me as an individual by allowing me to redeem the points earned against hotel stays worldwide."
It's important if you are going to benefit from your credit card that you don't build up a balance you will have to pay interest on.
The benefits of the credit card will be offset by the interest if you only pay back the minimum each month.
Richard added: "The only downside I can envisage would be the temptation to use the card to make purchases which were beyond the means of the user.
"The interest charges in the event of not clearing the balance each month would soon outweigh the saving delivered by free hotel stays."
Check out some of the reward credit card deals on the market now at our comparison website.
Spread repayments on a zero per cent interest card
One of the other major benefits of a credit card is that the right kind can provide you with an interest-free loan.
Zero per cent interest credit cards are becoming increasingly popular as alternatives to loans or finance.
With interest rates on the cheapest personal loans starting at eight per cent (and that's if you are really lucky and have a completely unblemished credit record) these credit cards already look attractive.
But if you also factor in that a number of the credit cards are offering the zero per cent deal as an introductory offer for up to a year, providing plenty of time to repay the balance, it's a no brainer.
Watch out if you are planning on taking out a loan for a large amount – in other words, more than the limit on a zero per cent credit card – this technique will not work.
Likewise, if you do not think you'll be able to pay the loan back in the time it takes for the zero per cent period to expire, you might want to assess whether it will be as beneficial.
If you have debt on an existing credit card you are struggling to repay at the high interest rate, switching to a zero per cent on balance transfers card, would save you money too.
Claire Francis, site editor of Moneysupermarket.com, said: "If you have a good credit history there are some great offers to be had.
"If a £2,000 debt on a card at the average rate of 18.31 per cent APR is switched to a credit card offering zero per cent interest on balance transfer for the introductory period, such as the Virgin Credit Card, there would be no interest payments in the first year."
It is certainly a better option than taking out an expensive consolidation loan.
You can find a selection of balance transfer and purchase credit cards on our comparison tables.
Improve your credit rating
Believe it or not, taking out a credit card can actually be an excellent way of giving your credit rating a boost.
By taking out a credit card, using it regularly and always paying back the balance, you are effectively showing the credit ratings agencies that you are reliable.
James Jones, consumer education manager at Experian, said: "You'd think someone with no history of debt would be attractive to lenders but the reverse is often true.
"Lenders want you to have a history of making repayments on time and in full – if you've never borrowed, they have no way of knowing how you'll make payments in the future.
"They'd much rather see a credit report showing a few well-managed loans or cards and regular, reliable repayments."
He explained that making repayments in full every month was likely to result in a better credit score because it showed you could afford your current borrowings.
However, make a late repayment and you will get a lower score.
As with all our tips for getting the benefits of a credit card without paying for them, the key here is pay back your balance in full every month.
Otherwise, you'll end up paying with your credit score.
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