1. An Introduction to Credit cards

WILL that be paper, or plastic? These days, our answer to that question is most likely to be plastic, as an increasing number of us rely on credit cards for our spending needs.

Whether it's to spread the cost of an expensive purchase over several months, or to gain points towards a reward item, UK consumers are using credit cards more than ever - and owing close to Ł180 billion as a result.

With the relatively easy availability of credit today, more can get in on the act - from greater numbers of companies offering Visa, MasterCard or store cards, to more people being approved for cards, including students and even those with shaky credit ratings.

A credit card is a simple way of obtaining a credit rating and, used wisely, can help provide flexibility in spending and even bonuses like cash back offers or travel credits. However, they can also be an easy way to get into serious debt, when used improperly.

Many people are lured into applying for certain credit cards with the promise of low - sometimes ridiculously low - interest rates, but depending on your personal circumstances and financial situation, there may be more important factors to consider.

It's also crucial to check the fine print, as a 0% interest rate may only last for the first six months, and then jump to 19% afterwards. A store card offering 15% off with the first purchase may be carrying a prohibitive 29% plus interest rate.

As a financial data comparison site, Moneynet.co.uk can direct you to the best deals to meet your needs. The Internet makes it easy to shop around to find the best deals, but you need to ensure that a deal really suits you.

The first step is to determine what kind of credit spender you are.

Credit Cards - Balance Payment

Always pay off balance in full every month
You use your credit card for everyday purchases, from groceries to petrol to household goods, and you never carry a balance over to the next month. In your case, the interest rate is irrelevant, as you'll never suffer the consequences of it.

To avoid paying any charges at all, choose a card with no annual fee; however, you may prefer a card with a small annual fee that offers bonuses on the amount spent, such as travel rewards or cash back on purchases. As a regular spender, you'll be able to realise these bonuses more quickly.

You need to ensure first that the card you choose has an interest-free period, and that you always pay before that period is up. Some cards offer up to 59 days interest-free, and you can ensure you are always on time with your payment by setting up a direct debit with your bank for the full amount each month.

If you ever plan to use a credit card for big-ticket items as well, such as holidays or large purchases, and not paying off the full balance immediately, it may be worth getting another credit card with lower interest charges and using it only for that purpose.

Usually pay off balance in full each month
You use your credit card regularly, for everyday purchases as well as the odd luxury item, and though you try to pay it off in full each month you don't necessarily mind carrying the odd balance over.

In your case, the interest rate isn't irrelevant - you need to ensure that you don't pay heavily for not paying off in full each month. To keep charges down, choose a card with no annual fee, and a low standard rate of interest.

You may also be interested in cards with cash back or travel rewards schemes, but these cards will not necessarily have the lowest interest rates. Check the rate of rewards on each scheme to determine whether they are worth it for you; for example, if your average monthly spending rewards you with a basic domestic air ticket three years from now, you would probably save that much money by simply choosing a no-bonus low-interest credit card instead.

Rarely or never clear balance each month
You're the credit card companies' dream client, the one they make their money from, so you need to ensure they make as little as possible.

Shop around for the lowest interest rate you can find. In your case, a low introductory rate may not be a wise choice, unless you are prepared to switch cards again after the introductory period is over and the rate usually switches to a much higher one. Look for a low standard rate and no annual fee.

If you choose a low introductory rate - sometimes as low as 0% - that rate will revert to a standard level when the introductory period is over, so you'll need to look for a new card after six months or so depending on the offer.

If you are already carrying a large balance, many cards now offer a low (sometimes 0%) rate on balance transfers as well as a low introductory rate, reverting to a standard rate after a certain time period and/or on any new purchases made on the card. If you have a balance you want to pay off, you may consider shifting it to a separate card with a low balance transfer rate, and making new purchases on a separate card.

If you are trying to clear a balance, it's important to note that unless you are paying no interest at all, that balance will continue to rise even if you don't make new purchases. It will also take much longer to clear if you are paying only the minimum amount each month, as most or all of that payment will go towards interest charges. Paying a larger amount than the minimum each month will ensure that your debt is paid off more quickly.

What type of card should I go for, Standard, Gold…or Platinum

While carrying a Gold or Platinum card once conferred a certain prestige, these days there is very little difference between them although some credit card companies will insist on charging a fee for a Gold card, for example.

Sometimes this kind of plastic does come with more bells and whistles - you might get better benefits like travel cover, for example, but the reality is that most adults with sound credit histories on modest incomes can apply for Gold or Platinum cards and they will not be aware of any difference to plainer plastic in their purses and wallets.

Don't forget that the credit card companies don't just make their money on unpaid balances. Depending on how or where you use your card, you may be hit with unexpected charges, so it's important to read all the terms and conditions of the card before you agree to use it.

The good news is that, as of March 2004, credit card issuers have had to summarise their interest charges and features in what's known as an "honesty" box, making their terms easier for the average consumer to understand. Check the conditions carefully, making reference to how you will be using the card.

How are the monthly payments allocated to the total owing?
You might hope that a monthly payment towards an outstanding balance would go towards the oldest charge first, or the highest-interest-rate balance first, but that is likely not the case.

For example, if you have a credit card with a balance transfer at 0% and new purchases at 16.9%, the monthly payment will likely go towards the balance transfer first, ensuring that your interest rises more quickly. Be sure you understand the small print regarding your payment allocation - known as the "payment hierarchy" - before you agree to the terms and conditions.

Should I use my credit card on holidays abroad?

Many people have switched from using cumbersome travellers' cheques to simply charging all their holiday expenses and purchases, at least in destinations that widely accept credit cards.

Credit cards can be a more convenient and safer option than openly carrying cash, but they may also turn out more expensive. First, don't expect to get bank rates of exchange - the credit card will add a percentage to whatever its own rate is, so you're paying more than you would at the bank.

Another reason people often use credit cards abroad is that they can withdraw cash at ATMs from their card; however, cash advances from a credit card are never recommended, either at home or away. Almost all cards charge interest on cash advances immediately, so you pay as soon as you withdraw the money. If you take cash out abroad, you'll pay a worse exchange rate, interest and possibly a handling fee for the transaction as well.

However, many cards offer benefits for travellers. These can range from discounted travel insurance to protection on purchases, fast replacement of lost or stolen cards and general assistance for travel delays.

Are individual store cards a better option?
Almost certainly, individual store cards - for furniture, clothing or electrical goods retailers - are an expensive alternative to regular credit cards.

Though they often offer bonuses, such as discounts on initial purchases or 'favoured shopper' discount days, they will likely have much higher interest rates than a Visa or Mastercard. An outstanding balance on an individual store card could quickly grow into a much larger bill than the original purchase.