Money

What to consider before you get a new credit card

Published

3 days ago

September 17, 2024

What to consider before you get a new credit card

One of the best perks of using a credit card is the protections afforded under Section 75 of the Consumer Credit Act 1974.

Transactions between £100 and £30,000 are covered by the Act, which lets you raise a claim for a breach of contract or misrepresentation by the supplier of goods or services.

That means if you bought something using a credit card and it didn’t arrive or wasn’t as advertised you can make a claim. Crucially, your credit provider is also responsible (as well as the retailer) if something goes wrong, so you are in a strong position to get your money back.

What will I be using my credit card for?

There are different cards for different uses, so it’s important to think about what you are going to use the card for.

James Daley, of consumer group Fairer Finance, says if you want to transfer a balance from another card, you need to be looking at the longest period you can get a 0pc deal for, but also keeping an eye on the fee.

“There are cards that don’t charge any fee at all, but obviously they tend to have shorter interest-free periods,” he says.

“There are cards with longer periods, of over two years, but they tend to come with a fee of 3pc or 4pc, sometimes higher.”

Should I get a credit card or a loan?

Credit cards can be cheaper than taking out a personal loan, but the 0pc interest period tends to be shorter.

Daley says: “Taking out a loan is better for where you think you’re going to need longer to pay it off and it’s a bigger amount, like a car, for example, or some other significant purchase.

“Credit cards can be really good for modest amounts of borrowing, which you think you’re going to be able to pay back over a couple of years, like a holiday.”

Is my authorised overdraft cheaper than getting a credit card?

Your authorised overdraft is almost never cheaper than getting a credit card, Daley says.

There are banks that have a small interest-free overdraft, like £100 or so, but most overdrafts will charge interest of 25pc to 40pc.

Daley says: “They tend to be much more expensive ways of borrowing over the long term, so they’re really only good for short-term amounts of borrowing.”

For example, if you’re paid your salary on the first of the month, and have run out of money on the 25th, an overdraft can help you fill the gap before your next pay cheque.

But it’s not going to be a good way to borrow any significant amount of money for the long run.

An exception to the rule is for students, who tend to be offered bigger overdrafts and longer interest-free periods.

Can I make repayments?

Daley recommends having a plan for paying off your debt. It is important to pay off the credit card balance in full by the end of the interest-free period.

Otherwise, you can get charged sky-high interest. Those who fail to pay off their balance are being stung by the highest rates on record, according to financial analysts Moneyfacts.

The average purchase interest rate (APR) on a credit card stood at 34.6pc in the last quarter of 2023 – a 4.3pc yearly rise.

Rachel Springall, finance expert at Moneyfacts, says that “over the past quarter, the average APR has been fuelled by a mix of interest rate rises, card fee rises, withdrawals and the size of fees on new cards launched”.

Setting up a regular direct debit can help you pay off the balance and avoid missing payments.

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