What are the cheapest credit cards?
SAY "cheap credit cards" and everyone will assume we're talking about one of the many 0% deals available.
When used correctly these are, hands down, the cheapest way to borrow. But they're not the only way to borrow cheaply with a credit card.
In this guide we'll explain a bit about each type of card and when they work best - that is when they're the cheapest way to spend and borrow.
0% credit cards
The most popular credit card promotion is the one offering 0% on whatever kind of borrowing we have in mind, from everyday spending to one-off large-scale purchases, to cutting the cost of existing credit card debt through a balance transfer deal.
They're hugely attractive because they're incredibly simple: if we're eligible, we get the card then take our time paying off whatever balance we load onto it.
0% purchase credit cards
The main reason to look into getting a 0% purchase card is that we've a period of high spending coming up (Christmas, holiday, moving house etc), and we want to be able to spread the cost over a couple of months.
Depending on how much we need to spend, it's possible - and often wise - to find a credit card with a shorter 0% promotional term, as it can act as an incentive to clear the debt in as short a time as is realistic.
Some credit cards get rather sniffy reviews offer the briefest of introductory 0% periods - as little as three months, say - but for a bout of disciplined short term borrowing they can be incredibly useful.
Alongside standard credit cards that offer a brief 0% introductory period are the specialist zero rate purchase credit cards, some of which now offer in excess of two years' interest free spending:
Search for more interest free purchase deals using our main comparison table.
These are useful for two reasons. Firstly they allow for bigger initial purchases, because we've more time to pay back that higher expense before what we owe starts to incur interest.
Secondly they provide a security blanket of sorts against future borrowing needs - if in nine months' time we get a large garage bill or the washing machine blows up, we can spread the cost without paying a penny more than the initial bill.
There's more on how 0% purchase cards work here.
0% balance transfer credit cards
Balance transfer cards are a great way to slash the cost of existing credit card bills, allowing us to pull the debts from several together and pay them off at a lower rate of interest than we'd pay on a standard credit card.
Just as with those standard credit cards, rates vary, but the most popular are the 0% balance transfer cards, offering a range of time periods to repay what we owe. Here's a small selection of the zero rate balance transfer credit cards available at the moment:
Search for more 0% balance transfer deals in our main comparison table here.
As with the 0% purchase card market, there's a lot of competition among providers to get people to sign up to their cards, so the promotional periods have grown and grown - at the time we're writing this guide, the longest 0% period offered is 41 months.
Many balance transfer card providers are therefore choosing to compete against each other in terms of the other feature that can cut the cost of our borrowing: the transfer fee.
It tends to be that we can get either a very long promotional balance transfer period, or a very low transfer fee; there are several cards that come with no charge for transferring debts to them, but they usually offer shorter 0% repayment periods.
That isn't always the case, and there are cards that offer a good compromise between the two: a fairly long promotional rate and a relatively low transfer fee.
To tell at a glance how a card measures up:
- A typical balance transfer fee is around 3%
- In December 2016, the average 0% balance transfer period offered was 21 months long
There's more on how 0% balance transfer cards work in this dedicated guide.
The golden rules
Interest free credit cards are without doubt the cheapest way to borrow - if we use them correctly. We can't emphasise this last point enough.
A frightening number of people lose the 0% rate before the end of the promotional period, reach the end of it without having paid off what they owe, or use it in a way not covered by the 0% promotion, and are shocked by how expensive their cheap borrowing has suddenly become.
These, then, are the golden rules to making 0% cards the cheapest they can be.
Always make at least the minimum monthly repayment. Notice how we keep referring to the "promotional rate" or "promotional period" above. That's because 0% purchase and balance transfer periods are special offers rather than an integral feature of the card.
Almost without exception, breaking one of the terms and conditions of having the card - missing just one payment, or going over the credit limit by just 1p - is enough to result in the promotional rate being removed.
From that point on, any outstanding balance on the card will be liable to interest at the standard rate (which at the time of writing is often around 18.9%) - and we'll be charged £12 for our mistake.
Clear the card within the 0% period. The first rule ensures we keep the interest free period for as long as possible. This rule ensures we're not hit by interest payments once that period is over.
The simplest way to make sure we clear the balance before the normal APR kicks in is to divide the amount we owe by the number of repayments we have before then, and treat that figure as our new minimum monthly repayment.
In the case of 0% purchase cards, where there's the temptation to spread (or put off) the cost of further items, this can be more difficult to manage - but in that case, we should apply the next golden rule to the extra spending:
Pay the card off in full every month. When we're buying one or two big ticket items, the whole point of a 0% purchase credit card is to spread the cost of borrowing. If our zero rate card is for general spending, however, get into the habit of paying off the balance in full every month.
If we've used our 0% purchase card to buy a couple of big ticket purchases then for everyday spending, we need to combine paying the adapted minimum monthly payment and paying off any additional expenditure in full.
Use the card only for its designated purpose. Credit cards offering matching interest free balance transfer and purchase periods are becoming more common, but if our card isn't one of them, it's best to use it for the one job: purchases or paying off a transferred balance.
In addition, it's worth doing our very best never to use either for a cash advance - which include using a credit card to get cash back at the till with a normal purchase, buying lottery tickets or foreign currency - generally incur interest at a higher rate than our credit card's standard rate, charged from the day of the transaction.
There's more on what counts as a cash advance here.
Failing to repay in time
If cardholders follow none of the other rules above, they must continue to make at least the minimum repayments if they want to keep their credit card borrowing as cheap as possible.
But sometimes events can get in the way, putting us in the situation where we're not going to be able to pay off a balance before the 0% period ends. If this is the case, it's best to plan ahead.
A few months before the existing 0% deal comes to a close, start looking for another 0% balance transfer deal in order to move the remaining debt across before it can start incurring interest.
Alternatively, if we'd rather not face the stress of trying to pay off a large debt in a set time, there is another way to borrow cheaply using a credit card.
Low rate credit cards
Low rate credit cards are the quiet and overlooked cousins of interest free credit cards. Their appeal isn't immediate, but they can be incredibly effective in reducing the cost of our borrowing, and making future borrowing cheaper.
Their main appeal is a much lower APR - the standard rate of interest charged on purchases or balance transfers. Yes, a low APR is more expensive than a 0% promotional rate, but it won't vanish if we make a mistake.
With the balance transfer versions of these cards, the other advantage is that they often have a low or non-existent transfer fee:
For those who have a relatively small balance to transfer, a low rate no fee balance transfer card can be cheaper than a 0% balance transfer card that charges a transfer fee.
Those who have a lot more to pay off can benefit too: there's no expiry date on the lower rate of interest, which removes the stress related with trying to repay a large debts in a set time.
Rules and representative rates
Bear in mind that as with many credit cards, the representative rates (those quoted above) are the lowest available: these rates must be offered to at least 51% of applicants, but that means that up to 49% of holders could be offered a higher rate.
The better our credit history the better our chance of being offered the lowest available rate - but even the highest rates offered with low APR cards tend to be lower than the average rates offered with standard rate credit cards.
Note too that these cards are more forgiving when it comes to the golden rules outlined above; in fact, we only really need worry about the first and last:
- Always make at least the minimum monthly payment
- Use the card only for its designated purpose
Obviously, as the balance is subject to interest, it's in our interests to pay it off as quickly as we realistically can every month - but there's no danger of being moved onto a much more expensive rate if we can't.
There's more on low interest cards and how they work in this guide.