Give yourself a bit of credit

OVER £12.6bn was spent on credit cards in September 2012 alone. They’re a convenient way to manage your expenses -- you can spread the cost of large purchases, give yourself an extra layer of protection against fraud, and they could help you build up a good credit history if used sensibly.

But given the size of the market, and the number and variety of products available, finding the best deal can be a daunting process. Interest rates, balance transfers and extra benefits can cloud your ability to make a clear decision. So how can you find the best card for your needs?

STACK UP THE COSTS
The annual percentage rate (APR) is the easiest way of measuring how much a credit card will cost you. It represents the interest rate levied on purchases, plus any additional charges.

But should APR alone be influencing your decision? Michelle Highman, chief executive of Credit Action advises caution. “If you pay your credit card off each month, APR is irrelevant.” But this isn’t the full story. “Your circumstances may change, so shop around for the lowest APR,” she says. Often the more extra benefits a card gives you, the higher the APR will be. So it’s important to do your calculations.

And APR isn’t the only charge you may face. If you have existing debt you want to move to a new card, a low balance transfer rate can be useful. Cards offering 0 per cent on balance transfers for a limited period allow you to park your debt with no interest.

But this rate will often be accompanied by a fee. This could be added to the debt you transfer, independent of any introductory offer. Be sure to work out whether you can pay off your debts within the allotted time.

EXTRA BENEFITS
Some cards offer extra incentives. Cashback cards, for example, give you back a percentage of the money you spend with them. But these cards usually come with a high APR and complicated reward systems.

Michael Ossei, personal finance expert at uSwitch.com, thinks they could be useful for some. “If you are vigilant in paying off your balance, using a cashback card is a no brainer.”

But the deals are invariably fiddly -- the cashback rate may be capped or could vary by time of year. There may also be high annual fees. So make sure you know exactly what the offers entail.

If your annual income is sufficient, you may be eligible for a premier card – a desirable badge of success. But don’t let social standing get in the way of a good deal. If you don’t use added extras like spa days or travel insurance, their high annual fees could be a cost worth avoiding.

UP YOUR RATINGS
Credit cards represent a line of credit like any other loan. Your ability to repay in full and on time is kept on record and contributes to your credit score. This means that the way you use your card could affect your eligibility when applying for a mortgage or another significant loan.

Being timely with your repayments is just one way of boosting your score. Another method is reducing the number of cards you have, as each new card increases the amount of credit you have access to. External affairs director at Equifax Neil Munroe warns that financial providers assessing your history pay more attention to this total amount than the actual debt you have to pay off.

Ossei suggests “looking at how many cards you have. Consider consolidating your debts onto one.” Stay on top of your finances by setting up a direct debit that surpasses the minimum payment due on your card each month.

Choosing the right credit card is not as simple as going for the lowest rate of APR you can find. Take into account your financial situation and spending habits and remember that the way you use your card now will impact on your financial standing in the future.