Why not remain in debt?

Card holders who pay in full each month should think again

For years, keeping one step ahead of credit card companies has meant clearing your balance every month to avoid paying interest on purchases. But now the arrival of 0 per cent introductory offers means the canny thing to do is
not to clear your balance every month.

For years, keeping one step ahead of credit card companies has meant clearing your balance every month to avoid paying interest on purchases. But now the arrival of 0 per cent introductory offers means the canny thing to do is not to clear your balance every month.

Credit cards used to be regarded as simple products. They enabled those who paid off their balances in full to enjoy an interest-free period of anything up to 56 days, while those who didn't had the benefit of being able to pay for purchases gradually rather than outright.

As the competition has hotted up, credit cards have grown in complexity. The standard annual percentage rates (APRs) vary greatly; introductory offers are popping up all the time; and loyalty points and cashback enhance the benefits of paying by credit.

It has become advisable to shop around to maximise the benefits available to you and minimise the interest you pay if you do not clear your balance every month.

Cahoot was the first credit card issuer to offer a 0 per cent interest rate, and its first 25,000 customers are enjoying an interest-free period until June. Egg and Capital One have followed suit by offering new customers an interest-free period for the first six months. Egg also gives 1 per cent cashback on card purchases.

There are other providers which have low introductory offers. RBS Advanta is charging 2.9 per cent interest until June, and Nationwide has an introductory rate of 3.5 per cent for the first six months.

Low rates such as these are good news for the 50 per cent of credit card holders who do not clear their balances at the end of the month. But what a lot of people don't realise is that the other 50 per cent who do repay what they owe in full can also benefit.

"People who pay their credit cards off in full each month, and it was good to do so, should look again at their course of action, as they could actually be doing themselves a disservice," says Simon Nixon, chief executive of Moneysupermarket.com.

The reason for this is that while the credit card providers won't be making any money from you if you clear your balance, you can play them at their own game and make money out of them and their low offers.

Rather than pay your balance off in full at the end of the month, consider paying the minimum required and put the remainder of what you would normally pay into a savings account. That way you can be earning interest throughout the introductory period.

At the end of the offer, when the introductory interest rate increases to the standard rate, you will then have the amount needed to clear your balance from the money in your savings account, plus interest.

Calculations from Moneysupermarket show that, if you get an Egg credit card (0 per cent APR for the first six months and a 1 per cent cashback) and a Cahoot cheque account (6.5 per cent annual equivalent rate for balances under £5,000 and 7.1 per cent above £5,000), you could gain £225 in six months by not clearing your balance and paying only the minimum during the introductory offer. This amount assumes the cardholder spends £1,500 a month on the card.

If you don't fancy an internet account, there are other savings accounts that offer good rates of interest (see table). Firms now offering cashback include Alliance & Leicester, American Express and Morgan Stanley Dean Witter (MSDW).

* Contacts: Alliance & Leicester, 0500 838383; Amex, 0800 700111; Cahoot, www.cahoot.com; Egg, www.egg.com; Moneysupermarket, www.moneysupermarket.com; MSDW, 0800 917 1333; Nationwide, 0500 302011; RBS Advanta, 0800 077770.

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