Would you credit it?

28th August 2012  

A decade or so ago it would have been unthinkable for the consumer to place a large purchase, such as a car, on a credit card. Credit cards were accused of leading users into ever-increasing circles of debt with quickly escalating interest rates. Sensible consumers were conditioned to trundle off to the High Street banks or finance companies to get the loan required for any large purchase.

However with banks now no longer eager to lend to customers with anything less than a perfect credit rating, credit cards have actually improved their all round package of services to try to grab a larger market share of those looking for both short and medium term lending options.

Credit cards – no longer seen as the interest-hungry pacman of the ‘80s

Right now there are many High Street banks and building societies offering some amazing 0% interest on purchases deals on credit cards, some for as long as 36 months, although the average interest-free period is 16-24 months. This means that as long as you pay off the balance by the end of the interest free period then you get to use the lender’s money for absolutely nothing.

(You may want to read our section on cheap credit card loans.)

However, this great deal comes with a caveat of caution; if you want to take advantage of this perfectly legal ‘loop hole’ you must be disciplined enough to pay regular monthly payments on time and to accrue no more debt until the purchase has been paid off in full. If you have the willpower and the discipline to stick to that guiding principle, then credit cards present a great way to spread the cost of everything from the weekly shopping to luxuries such as a holiday abroad, and even bigger ticket items such as a car.

It’s a simple matter of economics

Let’s say you purchase a car at £5,000 and pay using a credit card that has a zero balance and offers 24 month’s interest-free credit. To pay off the total cost of the purchase within the interest free period is a little less than £209 per month so if you can afford that then you will purchase your car entirely with interest-free credit. A bonus then to the careful consumer.

This scenario is all well and good for the customer not tempted by additional purchasing throughout the interest-free term. But if you feel you could be seduced into racking up additional charges, especially nearing the end of the interest-free term when your balance has significantly lowered, then you would be wise to steer clear of credit cards and opt for a low-interest bank loan instead.

Swings and credit card roundabouts

If your credit score is less than brilliant you may find you don’t qualify for a loan at a favourable rate from High Street lenders. Your credit rating will also determine what kind of credit limit your card provider gives you. However, the credit card business is extremely competitive with supermarkets and retailers now offering cards with typically low rates. Be aware that it’s often the case that the interest charge ramps up rapidly if the balance is not paid off within the promotional period. The best deal will always depend on your individual credit score and financial circumstances, so be sure to check out what’s on offer before making your selection.

The advice is to shop around, and don‘t be tempted with a 0% rated card which zooms up to an astronomical APR after the initial period unless you are absolutely sure you will not be tempted to make additional purchases.

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