Five savvy ways to use credit cards

Credit cards can be heroes as well as villains. Here are five top tips to make them work harder for you.

They’ve had some bad press in recent months - but used correctly, credit cards really can improve your financial situation and make you wealthier. You just need to keep your eye on the ball, read the small print and use the right card for the right purpose.

Here’s a round-up of five savvy ways to use plastic - along with some ‘best buy’ choices.

1. Bag an interest-free loan

A credit card offering 0% on new purchases is one of the cheapest ways to borrow money: In effect, it acts as a short-term, interest-free loan.

You can also use it to get richer by stoozing – where you spend interest-free, and put the money you would have used to clear the balance into a savings account. In other words, you get to earn interest on interest-free money!

The crucial thing is to clear the balance before the 0% period comes to an end. And for goodness sake don’t use it for any other transactions - like cash withdrawals - that incur hefty interest charges.

At the moment, the Tesco Clubcard credit card offers the longest 0% purchase deal on the market, lasting 13 months (after that, the typical APR is 16.9%).

It also offers 0% interest on balance transfers for nine months (with a 2.9% transfer fee), and lets you to collect one Clubcard point for every £4 you spend – which can give you some fabulous discounts.

2. Get cashback

As the name suggests, cashback credit cards allow you to earn money back every time you spend on them.

This sort of card is only suitable for someone who can clear his or her balance - in full - every month. If you don’t, the interest you’ll be charged will almost certainly outweigh any cashback benefits.

The card currently offering the best deal on cashback is the American Express Platinum Cashback card. This pays a whopping 5% cashback for the first three months, up to a maximum of £100.

After that, a tiered rate operates (up to 1.25%, depending on how much you spend). Just be aware that Amex is still not accepted everywhere.

If you think this will cause you problems, check out the Capital One World MasterCard or the Egg Money World MasterCard instead. Both pay 1% cashback on all purchases, and charge annual fees of £18 and £12 respectively.

3. Collect freebies

If you shop at a particular supermarket, or are planning a special trip, a rewards credit card could ease your financial burden.

These cards work in a similar way to cashback cards, but you collect reward points instead of money. These points can then be exchanged for all sorts of freebies.

For example, the Lloyds TSB Airmiles Duo cards are the official cards of the Airmiles scheme. This slightly unusual ‘dual card’ concept involves you getting an American Express card and a MasterCard, to be used at stores that don’t accept Amex.

Both cards allow you to earn Airmiles as you spend - and new account holders will also get a 1,500 mile voucher - so if you’re planning an overseas break, this might be the right package for you!

For more help on how to choose a decent reward card, read My baby will pay for my holiday.

4. Clear a debt mountain

Enormous interest payments are one of the main reasons people struggle to get out of debt. A credit card offering 0% interest on balance transfers can act as a lifeline, slashing your monthly interest bill and allowing you to concentrate on clearing the debt itself.

Remember that these 0% deals don’t last forever, so you need to have cleared the balance before the promotional period ends. And they don’t allow you to get out of jail completely free; the longest 0% deals all come with transfer fees attached.

My favourite 0% BT cards are the Barclaycard Platinum card, the NatWest Platinum card and the Royal Bank of Scotland Platinum card. All three offer a 0% BT period of 16 months (the longest on the market) with a 2.9% transfer fee.

If you think it may take you longer than 16 months to clear your debt, opt for a lifetime balance transfer card instead.

One of these will give you some real breathing space, because they offer a low rate of interest for as long as it takes to pay off the transferred balance.

My top choice in this category would be the Barclaycard Platinum Simplicity card, offering a typical APR of 6.8% with no transfer fee.

Just remember that this rate is variable, so you’ll need to keep an eye on it to make sure it doesn’t rise. And of course you’re still being charged interest (albeit at a lower rate); so it makes sense to clear your balance as fast as you can.

5. Improve your credit rating

All the cards I’ve mentioned so far are for people with very good credit ratings: Providers have tightened their lending criteria considerably in the last few years, and if your score is less than squeaky-clean, your application will probably be rejected.

So, my last tip is for people who want to improve their credit ratings, and perhaps take out one of those market-leading cards in the future. Certain credit cards do help rebuild a damaged credit score, or build a credit history from scratch.

These cards need to be handled with great care, and paid off in full every month: ‘Bad credit’ credit cards typically come with very high APRs attached, so slip up and you could be landed with an enormous interest bill!

If you’ve had serious credit problems in the past (for example, you’ve defaulted on debts more than once) your best bet is probably the Capital One Classic card.

It starts you off with a fairly low credit limit (from £200) but will consider increasing it after four months, if you manage your account responsibly. Remember, this card comes with a whopping typical APR of 34.9%, so make sure you never end up paying it!

If your credit score is alright, but not brilliant, consider taking out the Capital One Progress card instead.

This may offer you a higher credit limit than its ‘Classic’ counterpart. Again, the initial typical APR is 34.9%; however, this card promises to lower the rate in stages, as long as you keep up repayments and stick within your credit limit.

With this proviso, your rate should have dropped to 19.9% (variable) within 18 months.

As you can see, it’s all about playing your cards right. Good luck!

More: Ten credit cards I hate | 12 ways your credit card rips you off