While failing to pay off a credit card in full each month can lead to high interest costs, credit cards can also be profitable in a variety of circumstances.
For example, reward and cashback cards can improve an individual’s financial situation over the course of year. Likewise, a balance transfer card may reduce existing interest costs, while an introductory 0% interest rate on new purchases may be attractive to an individual who has a large upcoming payment.
For consumers who are travelling internationally, a travel card could save them a considerable sum of money during their trip.
The allure of cashback and rewards
There are a variety of options available for consumers who want to maximise their rewards or cashback through spending on credit cards. Cashback may be a simpler option for individuals who would rather obtain a set reduction to their credit card statement, which is applied on a regular basis. Reward cards could be more attractive for consumers who already shop at specific stores where rewards are accumulated faster, or who are able to adapt their spending to maximise the points available at different retailers.
Since reward and cashback cards can sometimes offer relatively poor (i.e. high) rates of interest, it is important to pay off the balance in full each month. Otherwise, the rewards or cashback being received may not be worth the additional interest cost.
Boosting your bottom line with a balance transfer
For consumers who have existing credit card debt, a balance transfer card could be a worthwhile move. It may provide a 0% interest period, which allows an individual to slash the amount of interest they pay on existing debt. For example, a debt of £2,500 that has an APR of 18.9% and where an individual is repaying £125 per month could be paid back four months earlier on a balance transfer card, assuming the person keeps making repayments at the same level. In doing so, a total interest saving of £475 could be made.
Of course, balance transfer cards often charge fees, which need to be deducted from the savings on interest payments. However, the fees may be less than the amount of interest saved from obtaining a balance transfer card. In the above example, a 3% fee of £75 would be less than the total interest saving of £475.
More 0%: The introductory 0% interest rate for purchases
A number of cards offer introductory offers to try and entice new customers. One such offer is a 0% interest rate offer on purchases, which may be applicable to spending within a set period of time after account opening. An individual who knows they will make a large purchase has the chance to benefit from a 0% interest rate on the loan. This could mean they pay less interest than they otherwise would have done.
Saving while on holiday
Using a credit card when abroad can be expensive, with a number of non-travel credit cards charging around 3% in non-sterling transaction fees. Meanwhile, cash may not be a secure means of paying for goods and services internationally. A possible solution is a travel card that does not charge transaction fees when used to pay for items in a currency other than sterling. A travel credit card could significantly reduce the total cost of an international trip.
Since many travel cards do not charge an annual fee, they may be appealing as a second credit card. This could make them attractive both to frequent travellers as well as individuals who go abroad once or twice a year on holiday.
Takeaway
While credit cards can lead to interest costs, they may also be beneficial to an individual’s financial situation. They could allow an individual to maximise their spending through rewards/cashback, or cut their interest costs through obtaining a new card with features such as a balance transfer offer. An introductory 0% interest rate on new purchases could further reduce interest costs, while a lack of a non-sterling transaction charge could save an individual significant sums of money when travelling internationally.
