How to find the best credit card deal for you
One of the most un-nerving things to happen during this recession is to find that the Bank of England has cut base rates one day, yet the next day you get a letter from your credit card provider announcing that they are raising rates -- and to eye-watering levels too.
Capital One, a lender that specialises in issuing credit cards to the low paid, announced it will raise interest rates by 6.94% -- so you could end up paying 29.94% on cash advances and 26.0% on purchases. It's not just the low-paid who are hurting. American Express's BA Premium Plus card (marketed to those who collect air miles with British Airways Executive Club) has raised rates from 36.6% to 46%.
The average punter may think that the building societies offer a better deal -- but the Nationwide too has raised credit card interest rates. Its rise was modest -- a maximum of 2%, taking its basic card rate to 19.9% from 6th May -- but it was still a rise.
But not all lenders are raising rates and there are still some excellent deals in the market.
Barclaycard made the welcome announcement that it was freezing its credit card interest rates for existing customers until June 2009 (though it said it may raise rates for new customers deemed to be risky). Abbey (which is owned by the Spanish banking giant Santander) is offering a balance transfer at 0% for 15 months, and 0% on purchases for 3 months. The APR after the introductory period is 15.9%. If you currently have a large balance, it's worth considering transferring to them.
Before you decide which credit card to go for, use price comparison sites -- such as CreditCards.com United Kingdom -- to compare credit cards. Plus you can also visit the website of the bank or building society directly and browse the rates they have on offer.
The key to getting a good credit card is to be a good credit risk. For instance, Barclaycard's APRs range from a low 6.8% for the best new customers to an expensive 27.9% for the least creditworthy.
So how do you qualify for the good credit card rates? Lenders are looking for people who have never missed a payment in the past few years, have a stable income, don't have County Court Judgements (CCJs) or Individual Voluntary Arrangements (IVAs) and have never been declared bankrupt.
In addition, credit card lenders started sharing information about customers from December 2008. This gives them access to more information than is on the official credit report. For instance, they can now tell if you make just the minimum payments on your other cards, whether you are a "rate-tart" who goes from one 0% balance transfer deal to another (the lenders find it hard to make profits from this type of customer), and whether you make purchases on your cards or whether you use them for cash advances.
Before you even think about applying for a new credit card, it's financially smart to take some time to mould yourself into a good credit risk. Here are some suggestions on how to do it:
1. Pay off more than the minimum on your credit card balances. Lenders believe that people who pay just the minimum on all their credit cards may be financially stretched and at risk should a life-event happen (say illness, an emergency that requires money or job loss).
2. Lenders also look at the ratio of outstanding debt to monthly income. This is all your debt payments, including mortgages and loans (and they use minimum payments on credit cards) divided by your monthly income. If this is higher than 35%, a flag goes up. If you are in this situation, it's pointless applying for another credit card, as you will unlikely get a better deal than the one you are have now. You need to bite the bullet, cut expenditures and get your debts down a bit. Once you have reduced your debts, you are in a better position to apply or transfer existing balances to a better credit card.
3. Make sure all your debt payments are made on time, and always make sure you at least pay the minimum. If your record is not spotless, no lender will accept you in the current climate. If your record is poor, you will need to spend the next 12 months improving it by making all payments on time before you apply for new credit.
4. Have you got access to too much credit? Your credit report will show not only your outstanding debt, but the credit limit and hence the available credit. If you have too much available credit, the lender may worry that you might at some point access it all, and get into difficulty.
5. Don't waste your time or the lender's time by making multiple credit card applications. Lenders worry with good reason about people frantically trying to get credit from everyone.
To ensure you get the most competitive rates on the market, first become a good credit risk by paying attention to points 1 to 5 above. Then carefully search for the best credit card deals, choose the one you want, and then apply for it.
Published: 8 April 2009
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