What type of card is best for me?

There are basically three ways of using a credit card: straightforward purchases, moving an outstanding debt over from another card (known as a balance transfer), and withdrawing money from a cash machine. Providers tend to charge a different rate of interest for each, and then implement a payment hierarchy whereby the cheapest debt is cleared first, leaving you accruing interest at the highest rate.

Say you took out a new credit card and transferred £1,000 over from another card, made a £500 purchase and withdrew £200 from an ATM. You can’t afford to clear the £1,700 in full at the end of the month, so instead you plan to repay £150 each month. However, rather than being charged interest at one rate, you are charged 5% for the transferred balance, 16% for the purchase and 25% on the cash withdrawal. The chances are, the provider will use the £150 you pay off each month, to clear the balance transfer first – the last debt to be repaid will be the £200 you withdrew from the cash machine, and that is the balance you are charged the highest rate of interest on.

Annual fees are still unusual, so the best way to avoid such tactics is to use a different credit card for each different purpose, that way you’ll get the most out of your credit card for the minimum cost. (One tip though, is never use a credit card for withdrawing cash – not only are the interest rates for cash withdrawals usually significantly higher than those for purchases and balance transfers but you also get no interest free period. Interest is levied from the day you make the withdrawal, so even if you pay off your balance in full at the end of the month, you will not be able to escape it.)

Comparing credit cards has become easier. Providers are now obliged to summarise their key product features such as interest charges and fees in an easy-to-understand format, known as a summary or “honesty” box. This will appear in all credit card marketing information.

To make things even easier, we’ve identified four common scenarios which should help you work out what type of card is best for your circumstances:

I always clear my balance in full:

If you often use your card for purchases but clear the balance in full each month, you avoid paying interest.

Most cards offer an interest-free period of up to 59 days from the date of the transaction, which gives you some breathing space before your payment is due. However, there are a few deals that do not offer any grace period even if you clear your debt in full each month, so watch out for these.

If you always pay off your credit card, the interest rate is irrelevant. Instead look for deal that will reward you for spending. A number of cards offer reward schemes either in the form of cashback, charitable donations or loyalty points. Some are more generous than others so go for the card that gives you the best return on your spend.

If you can afford to clear you balance in full each month, but have a tendency to forget, or be late, making your payment, then set up a direct debit. This is the easiest way to guarantee you’ll always pay off your debt on time and avoid a penalty charge.