Do We Still Love Our Credit Cards?

We've started to tighten our belts, and spending on credit cards is down. However, we suggest three good reasons why you should put your purchases on plastic!

At the end of last year, there were over 71 million credit cards in circulation, shared between 47 million adults. In other words, we have an average of 1½ cards per person. We certainly love our cards far more than Continental consumers do, as three-fifths of all European credit cards are issued in the UK.

Our love for credit cards really started to heat up back in the early Nineties. In April 1993, we owed a mere £9.8 billion on our cards. Five years later, this debt had doubled to £19.7 billion. By July 2001, it had doubled again, to £39.6 billion, and stood at a whopping £55 billion in April 2005. In other words, our total credit-card debt has gone up over 5½ times in twelve years. Crikey!

But something surprising happened recently. In a typical month, I'd expect total credit-card debt to increase by between £100 million and £500 million. However, between March and April, our credit-card debt actually declined the first monthly fall since 2003.

This reflects what's happening on the high street, with many retailers both large and small - issuing downbeat trading statements. We're also resisting the 'urge to splurge' by using our debit cards and spending only what we know we have left in our current accounts. I hope that this shift in behaviour will be accompanied by an increase in the number of cardholders who pay off their bills in full. After all, with annual interest rates as high as 25% APR, credit cards can be amazingly costly!

Still, here are three good reasons why you should rekindle your love affair with credit cards. If you want your relationship to blossom abundantly, then you may need a more passionate partner, so don't be afraid to 'ditch and switch'!

1. Cashback and other rewards

As I think 'cash is king', I prefer cashback cards to loyalty and reward cards, although you can double up and use both in the same transaction. This article explains how cashback cards work, and how to choose one. Make sure that you always pay off your monthly bill in full, as cashback cards often charge high rates of interest on borrowing, which wipes out the benefit of the annual cash reward!

Two cards stick out among current Best Buys: the Morgan Stanley Platinum MasterCard pays 2% on the first £2,000 of purchases and 1% on further spending until 1 August. From August, this halves to 1% and 0.5% respectively. The Amex Blue card pays 2% for the first three months, then 0.5% on the first £2,000 and 1% thereafter. You can dodge the £15 annual fee by spending at least £500 a year on your Blue card. Both of these Best Buys are available via the Fool.

2. No interest for up to nine months

If you have existing credit- and store-card debts, you can avoid paying even a penny in interest for up to nine months. Simply open a 0% credit card and transfer your debts to your new card. On the other hand, if you have no debt and just want to spend while avoiding paying interest, choose a card that offers 0% on spending. Sainsbury's Bank offers 0% on purchases for a whole year, but most cards offer six or nine months' interest-free spending.

Note that it's best to use separate cards for balance transfers and purchases, unless you find a card that offers 0% on both (there are two 0%+0% cards here). Otherwise, you could be hammered by interest, as most lenders use your monthly repayments to clear your 0% debt first and charge interest on your purchases!

3. Free insurance and extra rights when goods let you down

Many credit cards offer various free insurance policies, such as travel accident insurance, price protection, purchase protection, plus fraud and delivery guarantees for online shoppers. These are explained in The Twelve Best Things About Credit Cards. Personally, I don't think that these policies are worth paying for, but I'm happy to have them if they are provided at no cost!

What's more, thanks to Section 75 of the Consumer Credit Act, you enjoy extra protection when paying by credit card. If you buy goods costing between £100 and £30,000 on a credit (but not debit) card, you can claim against the card issuer if something goes wrong. Even if you have only paid a deposit on your credit card, you can claim a refund of the entire cost of the goods from the card issuer. So, if the goods fail to arrive, are damaged or defective, your credit-card provider "wears the supplier's shoes" and must reimburse you for your loss. Use this valuable safety net for all your major purchases for extra protection.

So, choose your credit card wisely and you could be paid to spend, pay no interest and enjoy enhanced protection. Just don't use it to fund a lifestyle that you can't afford, or you'll end up with a killer debt problem!

More: Get a great deal in our Credit Card centre | From 30% To 0% In Sixty Seconds!