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Spend & Save

How to make your credit cards pay

Britain's credit-card market is one of the most competitive in the world. Most cards have no annual fees, offer attractive interest-free introductory periods, and come with generous loyalty schemes. The downside is that they also charge hefty interest rates – typically between 15 and 20 per cent APR – meaning that they're an inefficient way of borrowing for any period of time.

However, if you use your credit cards wisely, there's nothing to stop you taking advantage of all the benefits while never paying the provider a penny in interest.

Interest-free deals

If you don't already have a credit card, it will now be tougher to get your hands on one than it was 12 months ago. That said, there are still more than 50 cards offering 0 per cent balance transfer deals for nine months or more – and the best of these offers 16 months interest-free. That means that if your application is accepted, you won't have to pay any interest on your current card debt for up to 16 months.

Although most cards usually charge a fee of about 3 per cent when you transfer a balance from another card, Ulster Bank offers a six-month interest-free balance transfer deal with no charge at all, while Barclaycard Platinum offers a nine-month deal with a lower fee of just 1.7 per cent.

If you have debt on one or more cards, balance transfers offer a great way to get yourself back on track. Be careful, however, not to use your card for any other transactions once you've transferred the balance (unless the card offers a 0 per cent deal for purchases as well), as you'll start paying interest on your new transactions immediately, and won't be able to pay off your newest debt until you have paid off the whole sum that was transferred when you took out the card.

If you don't yet have any credit-card debt and are thinking about making a big purchase, there are cards available that won't charge you any interest on purchases for the first few months. First Direct's Gold Card offers 0 per cent on purchases for a full year – although you have to be a First Direct current account customer to qualify.

Taking advantage of loyalty schemes

Not all credit cards have great loyalty schemes, but there are a few good-value ones out there that can make you money if you use them wisely. Some, such as the American Express Platinum Cashback card, for example, pay you back a small percentage of every purchase you make.

In the case of the Amex card, you'll get 5 per cent on all purchases for the first three months, and then up to 1.5 per cent thereafter, depending on how much you spend each year. Citi also has a generous cashback deal, paying you 3 per cent when you buy petrol at a Shell station, and 1 per cent on all other purchases.

Other cards offer useful rewards such as air miles. The Lloyds TSB Duo card, for example, pays you one airmile for every £10 you spend. The air miles that you accrue will eventually buy you a flight including taxes. You'll need to spend £15,000 on your card to get a return flight to somewhere in Western Europe.

If you're disciplined, cashback and other reward schemes can, in effect, be a one-way bet. Here's how it's done.

Do all your spending on the credit card each month, and put your salary into an instant access savings account to earn a bit of interest. Then, pay off the full balance on your card each month – but not until the last minute, so that you can maximise the interest on your salary. This will earn you a few extra pounds in interest and give you air miles, cashback or other rewards for simply doing spending that you were planning on doing anyway. And, as long as you always pay your balance in full and on time each month, it won't cost you a penny.

Finding the right card

Websites such as www.moneysupermarket.com and www.uswitch.com will help you to find the best deals on the market. However, in these credit-crunched times, the only people who will find it easy to get a new card are those with excellent credit histories and not too much other debt.

If that's not you, it's worth being a little more targeted when you select a card to apply for. Check your credit score by using websites such as www.creditexpert.co.uk or www.mycallcredit.com. These sites can also help to point you towards cards that you're more likely to be accepted for.

Although a card rejection won't show up on your credit rating, there will be a mark left every time you apply for a card. If your file shows that you've been applying for lots of different cards, providers may be less likely to accept you.