The Lowdown On Store And Credit Cards

Alison Hunt looks at how prudent Fools can save money with their store cards.

So, we've looked at loyalty cards and found that they can be well worth having, as long as you can put up with retailers nosing into your shopping habits. We now move on to store and credit cards.

Store cards are payment cards that can only be used in one store, or other stores associated within the same group. Of course, this is controversial territory. After all, how many times have you heard us state that store cards are the Devil's Debt? And indeed this is true -- many store cards have shockingly high interest rates. Typical APRs of over 25% are common, with one currently even breaking the 30% barrier, which seems incredible in an age where you can get 0% credit cards and the base rate is 5.25%!

It's therefore not surprising that store cards have been the focus of an investigation by the Competition Commission, whose report released in 2006 included the findings that APRs are, on average 10-20% too high, and that those with APRs of more than 25% should indicate to their cardholders that cheaper credit can be found elsewhere.

So why would anyone ever take out one of these evil cards? Well, if you consider the potential amount of money to be made, providers are unsurprisingly happy to offer inducements to get you to sign up. Immediate discounts, invitations to exclusive shopping events, access to special areas in-store and extra savings on sales items are just a few of the offers to tempt you to sign up. And of course, they hope that you'll fail to pay off your card in full and rack up lots of lovely interest for them!

But this is where smart Fools can really take advantage. If you're the kind of person that always pay bills on time, never leaves an outstanding balance on a credit card and are generally quite financially disciplined, you can make the most of your prudence. There are a number of cards out there offering all manner of discounts and gifts, from free flights to free gadgets - by taking one out you could take advantage of the freebies, and by paying your bill promptly ensure you never pay a penny in interest.

Branded Credit Cards

Not to be confused with store cards are retailers' credit cards. Shops such as Tesco, Sainsbury's and Marks & Spencer (M&S) offer their own branded credit cards which, unlike store cards can be used anywhere. Associated interest rates are generally lower, too. And one of the main benefits in this case is that they can be used to accrue loyalty points for, in many cases, stores that have no free loyalty scheme set up.

For example, the M&S &More card offers the chance to earn one point for every pound spent on the card in-store, and one point for every pound spent elsewhere. You'll be sent reward vouchers four times a year, depending on how many points you've accrued (100 points = £1) which can be spent in-store. What's more, buy any M&S furniture with the card and you'll pay no interest for two years. So use it as a normal credit card and you'll be earning money off vouchers for your shopping.

0% for new purchases

However, an extra factor here is the fact it also currently offers a 0% period on all new spending for a year. Careful use of this fact could mean that not only do you earn shopping vouchers; you could make yourself some free cash, too.

Save that cash...

By moving the majority of your spending to the credit card, rather than debit cards and cash, and paying off just the minimum each month (ideally by direct debit so you won't forget) you can stash the money you've spent into a high interest account. That money then earns interest over the year, and you accrue points for vouchers to be spent in store. A win-win situation for the organised!

Current Credit Card Offers

Asda credit card

Like the M&S card, the Asda credit card offers the only method of accruing loyalty points for its store. You earn 1 point for every £2 spent, and 100 points can be traded in for a £1 voucher. You'll also save 2p on every litre of fuel purchased at Asda petrol stations. And if you spend £50 or more at Asda.com with the card you can get your groceries delivered, for free, saving £3.99 each time.

Assuming you spend £100 a week on delivered groceries and own a car with a 50l fuel tank that you fill up weekly, you could save over £285 a year - £207 on grocery delivery costs, £52 on petrol and have earned yourself £26 in vouchers. And that's not even including spending outside Asda.

BMIBaby credit card

Alternatively, if you're a keen traveller, pick a card such as the BMIbaby credit card. You get a free return flight anywhere on its network with your first purchase, and if you spend at least £5k a year (around £417 a month) on the card you'll earn another free flight.

Here are some of the best branded credit card deals available at the moment:

Credit cards offering freebies

It's worth noting that the majority of these cards are credit cards, i.e. they can be used anywhere, and so give you the opportunity to rack up points more quickly.

Beware the 0% balance transfer deals!

Although we've learnt that credit cards that also offer 0% for new purchases can be highly lucrative, you need to watch out for 0% cards for balance transfers. Whilst they are a good deal if you're planning to transfer a balance from another, more expensive card, it doesn't usually work if you intend to use the card for new spending. Most credit cards employ negative payment hierarchy. So if you were to transfer a balance and then spend on the card, your payments may be used to pay off the cheapest debt (the balance currently earning 0%) leaving your new spending to rack up interest!

As a rule of thumb, if you do want to transfer a balance, do so and cut up the card.

Finally, remember that these cards are only for the financially disciplined. If you don't think you could pay off the card in full, each month, don't even think of applying - you'd lose more in just one missed payment than you would gain. But if you always clear that balance, why not make the most of it and earn some free gifts or vouchers to spoil yourself?