Credit cards that make you money

Clever cardholders win by using only these three types of plastic.

In 2008, British spending on credit cards reached a staggering £126 billion in two billion separate transactions, according to banking-payments group APACS. In other words, we Brits make purchases averaging £10 billion a month on our 'flexible friends'.

While credit cards are highly convenient for shopping (especially online), they do lure some users into over-spending. Indeed, some cardholders see their credit limit as a target, welcoming every credit-limit hike as an opportunity for more 'retail therapy'!

The big problem with not paying off your credit-card bill in full is that you pay interest on this debt, usually at sky-high rates. As a nation, we owe about £53 billion on credit cards, of which roughly £40 billion is interest-bearing debt. At an average interest rate of over 18% a year, this debt costs us around £300 per household per year. Ouch!

Now here's the weird thing: most UK adults don't pay interest on credit cards. This is largely because 17 million adults don't have any credit cards. What's more, many of the 31 million people who do have credit cards don't overspend and always pay off their bills in full. Thus, most of the interest is paid by people who use credit cards unwisely or excessively.

Clever cards for smart people

If your credit cards are costing you money, then what can you do to solve this problem? The simple answer is to do what the smart crowd do: use only credit cards that make or save you money, rather than those that cost you a packet.

Although credit cards were designed to make bank (and their shareholders) richer, these three types of card actually work in your favour:

•1.    Cashback

With a cashback credit card, you earn as you spend. What happens is that each purchase you make attracts a small rebate. These rebates build up into a cash refund which is paid to you (or credited to your account) once each year. For example, my latest cashback reward was almost £275, which I see as money for old rope!

With the best cashback worth around 0.5% to 1% a year, it makes no sense to use a cashback card while paying yearly interest at 18%+. Therefore, cashback credit cards are suitable only for cardholders who fully repay their bills each and every month. For the record, the highest payer is the American Express Platinum Cash Back Card, which pays an unbeatable 5% cashback in the first three months.

•2.    0% on purchases

Most standard credit cards offer between 45 and 59 days of interest-free credit to 'full payers'. However, a 0% on purchases card extends this interest-free period from weeks to months. Indeed, the best 0% on purchases cards provide between nine and twelve months of interest-free credit.

For example, I'm spending between £1,000 and £1,500 a month on a 0% on purchases card. But instead of paying my bill each month, I'm currently putting this money away in a savings account. Thus, I'm enjoying interest-free credit on my usual spending, while earning extra interest in my savings account. I'll use the money I've saved up to pay my bill once the 0% on purchases period ends. To me, this is a great way to defer my spending for up to a year, while making extra cash on the side.

•3.    0% on balance transfers

The last of our trio of money-making credit cards is a 0% on balance transfers card. If you're paying interest on existing card debts, then you can stop the clock on this interest by shifting your balances to a 0% balance-transfer card. Although this usually means paying a transfer fee, typically 3% of the value of each transfer, it does allow you to avoid interest for more than a year. In fact, my favourite card for 0% transfers, the Virgin Credit Card, charges no interest on transfers for sixteen months. This is such a good deal that I have a Virgin card at home!

In summary, clever cardholders should stick to using the above plastic. In addition, here's one bonus tip: when using your card abroad, or paying in currencies other than sterling, watch out for a 'foreign-currency loading fee' which makes purchases up to 3% more expensive. Credit cards issued by the Post Office are among the few not to levy this additional charge.

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