Most credit cards are only good for interest-free balance transfers OR interest-free spending. Don't make the mistake of using one card for both.
I'm a big fan of keeping things simple. I don't like financial products which combine features together which they really shouldn't. For example, in my article Avoid these scandalous savings accounts, I explained why I'm not keen on accounts which merge simple savings and risky investments into one confusing plan.
The same can be said of credit cards, and particularly those which are guilty of mixing interest-free deals on balance transfers with interest-free deals on spending.
I'm going to pick a few examples of market-leading cards which could lead you into trouble:
Watch out for: Virgin Credit Card
We're normally very positive about the Virgin Credit Card, because it allows you transfer a balance from another credit card and pay nothing in interest for 16 months. This is the longest interest-free period available on a 0% balance transfer deal. And, on the surface, it looks like a great choice for shoppers too. You'll get discounts on items you buy from the Virgin group when you pay for them using your Virgin card.
But the trouble is the while the balance transfer deal is still the best on the market, you only get a three-month interest-free deal on purchases. If you keep spending on the card once the three months are up, taking advantage of all those juicy discounts, you'll fall into the negative payment hierarchy trap.
Negative payment hierarchy
Negative payment hierarchy refers to the order in which your repayments are used to clear your balance.
How does this work in practice with the Virgin Credit Card? Well, for the first three months, repayments will be used to pay for your new purchases. But after this time, repayments will be used to clear the interest-free balance transfer.
In other words, after the first three months, any purchases you've made - or continue to make - will start racking up interest at 16.6%! And you won't start paying off this expensive debt, until the balance transfer is completely cleared.
The process of forcing you to pay off your cheapest debts first, known as negative payment hierarchy, allows credit card providers to make money out of you even though you think you're getting an interest-free deal.
That's why it's usually a bad idea to mix interest-free balance transfer deals and interest-free spending together.
My alternative choice: Halifax All-In-One Mastercard
But there's an exception to every rule. You can avoid the payment hierarchy problem by using a card which offers the same promotional period on balance transfers and spending. The Halifax All-In-One Mastercard comes up trumps here with a 0% deal of 9 months on both.
Just make sure your credit is completely cleared by the end of the introductory period or the typical APR of 15.9% will kick in. Ouch!
Watch out for: Santander Zero Credit Card
This card from Abbey offers 0% on balance transfers for 12 months, and 0% on purchases for 3 months. But the card is also widely accepted as one of best travelling companions with no fees on spending abroad and no cash withdrawal fees. (But interest is charged at a whopping 27.9% APR).
If you use the card for spending (abroad or at home) and a balance transfer, nasty negative payment hierarchy will rear its ugly head again. So, if you don't clear the entire amount you've transferred immediately, your holiday spending will stay on the card and you'll be charged a massive 18.9% APR after the three-month 0% period.
As usual, you won't be able to start clearing your holiday purchases until your balance transfer has been entirely paid off , costing you heaps more interest.
Having said all that, the Zero card is definitely worth packing in your suitcase - just don't use it for balance transfers as well.
Watch out for: Egg Money Mastercard
Egg has recently launched a new card which pays 1% cashback on everything you spend, with a host of other discounts and deals for a £1 per month fee. You can read more about it in the New way to earn 1% cashback on everything.
Alongside the cashback, Egg also offers a balance transfer deal with a lifetime rate of 8.9% and no balance transfer fee (most card providers charge 3%). But negative payment hierarchy applies here too. If you don't pay the card off every month, your cheaper balance transfer will be cleared ahead of your spending, which will trigger a rate of between 16.9% and 21.9% APR from the outset.
My alternative choice: American Express Platinum Cashback card
With the American Express Platinum Cashback, you'll earn 5% cashback in the first three months up to a maximum of £100, and then between 0.5% and 1.5% on everything thereafter. The cashback rate depends on how much you spend during the year.
Whether you'll earn more cashback with Egg or American Express depends on how much you spend. But I prefer American Express because there are no introductory 0% deals to lure you into the negative payment hierarchy trap. This card definitely ticks the 'simple' box.
Just make sure you pay your bill every month to avoid the 18.9% typical APR, and make the most of your cashback.
The best card for interest-free spending - and nothing else!
Finally, the longest 0% deal on purchases is courtesy of supermarket giant, Tesco with the Tesco Clubcard Credit Card. As long as you pay the minimum monthly repayment, you'll enjoy interest-free spending for a whole year. And you'll get extra clubcard points when you shop at Tesco too. Find out more by reading New top card for 0% on purchases.
There is a six-month 0% balance transfer deal too, but please avoid it at all costs.
Compare credit cards at lovemoney.com
More: Six golden rules for credit card spenders | Get a (non-Virgin) balance transfer credit card
Review the Virgin Credit Card on lovemoney.com or compare credit cards in our tables