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Debit cards or credit cards abroad: Which is best?

Summer is here, and despite the Mediterranean-style sunshine currently bathing the UK, many people will still be travelling abroad and splashing the “holiday fund” they have saved since this time last year. In many cases, that’s quite a considerable amount of spending, so how do you know you are getting the best from your money? Confused.com money analyst Alex Higgs explains all.

Well, many people still prefer to go abroad with a wedge of cash, or simply use the debit card they would normally use at home. And due to the high APR, and the fact most providers charge interest from that same day rather than the end of the month, I would never consider taking cash out on a credit card unless it was an emergency, so if you want to take out cash, in most cases the debit card will be the better option.

What to be aware of when making purchases abroad

However, when making purchases abroad there are a number of hidden fees that can make the cost mount up. One of the current leading debit cards, let’s call it Card X*, charges a fixed £1.50 fee for each and every transaction, in addition to a 2.75 per cent exchange fee.

If this talk about fees and percentages means nothing to you and has got you switched off, don’t look away just that because that’s playing into the hands of the banks and that is exactly how they make money.

Look at it in Pound terms, and say that on a seven day holiday, you make four purchases a day (including meals etc), with an average value of say £30. Well with Card X above, that means you get £840 worth of goods and services, but pay £905 for the privilege!

Looking purely at foreign purchases, one of the best alternatives right now is the Post Office Credit Card, which has zero fees on purchases - so in the above example, if the price is £840, you pay £840 – leaving you an extra £65 to blow on much more interesting frivolous things.

And as with any credit card, you benefit from the cover of Section 75 of the Consumer Credit Act– in short, your issuer will cover any purchases you make between £100 and £30,000 if they are faulty, the firm goes bust, or your order never arrives – a protection you don’t get with either debit cards, or cash.

Credit cards in the wrong or unsure hands can be a bad thing, but if you are smart, and know the pros and cons, you can use credit cards to your advantage.

 

Should I opt for a credit card that offers benefits?

This week's question is put to Alex Higgs, senior commercial analyst at Confused.com's credit card division...

QUESTION: If I pay off the balance on my credit card every month, which cards offer benefits and what are they?

ANSWER: During the 90s, people using credit was often seen as a sign of economic stress, as people used credit cards as long term flexible loans, paying off only the minimum each month. However, in recent years, there has been an increase in the number of credit cards holders paying their balance off in full each month.

For people who pay off their card in full, cashback or rewards cards are an ideal way to get something back on your everyday spend.Of the many cards on offer at the moment, American Express offers the strongest reward package, however it’s worth bearing in mind that AMEX is still not as widely accepted a credit card as say Visa or MasterCard. 

So if a fair chunk of your credit card spending is to be done at the corner shop, you may want to consider a Visa card instead. That said, most of the major retail chains accept Amex, so if you use your credit card mostly at high street shops, then Amex is probably right for you.

As the name suggests, cashback cards offer a certain percentage of the transaction value back as cash. This is a good reward, as cash can clearly be spent anywhere, unlike points, but there are less cashback cards on offer compared to rewards cards.

Rewards/points cards offer different deals, often depending on the issuer (i.e. airline cards offer airmiles, supermarket cards offer shopping rewards) – it is down to the individual to decide which rewards are most applicable to them.

If airmiles are your thing, the BMI American Express card from MBNA, available through confused.com, offers a bonus 20,000 airmiles if at least £250 is spent in the first 90 days, and 1.5 airmiles per £1 spent overall. Therefore, if you spend £250 a month on your card, after a year, you would have nearly 25,000 airmiles!

Whichever card you choose, it is important to remember that these cards only give a net benefit if you are strict in paying off the full balance each month – otherwise the interest paid will eliminate any benefit. Setting up a direct debit can be the best way to ensure you get the rewards you are looking for.

So to summarise:

·    Always pay off the balance in full

·    Pick the rewards most useful to you

·    Amex provide good rewards but check you can use it in the stores you spend most

If you have a question you'd like to put to the Confused.com team or Confused.com community, post your question in the comment section on the blog. Alternatively, e-mail editor@confused.com and we will do our best to provide an answer.

Life of Balance vs 0% cards – which is right for me?

Tackling your question this week is Alex Higgs, senior commercial analyst at Confused.com's credit card division...

QUESTION:  Should I opt for a Life of Balance credit card or a 0% deal?

ANSWER: Over the last few years, the trend has been for most credit card providers to entice new customers through the “payment holidays” offered by 0% balance transfer deals. However, recent months have seen an increase in the number of products that offer a Life of Balance rate which boast a lower than typical APR on balances transferred across.

To illustrate with an example...

Sharon has a card that offers 0% for 12 months, after which the card reverts to 18% APR
Joanne has a card that charges interest from month one, but at a lower fixed rate of 6%
Both have a balance of £2,000, and each month they pay off only the interest accrued the previous month.

In the chart above, showing monthly interest paid, we can see that because Sharon has a payment holiday in her credit card deal, Joanne is initially paying more interest – however, by Jan 2011, Sharon’s 0% period expires, and she starts paying interest, and nearly three times as much per month as Joanne. Come next July, Sharon’s total interest paid to date will be greater than Joanne’s. In the chart above, showing monthly interest paid, we can see that because

When comparing two deals like this, the key thing to consider is how quickly the balance is likely to be paid off. In this example, if Sharon were confident she would have paid the balance off by the end of June 2010, she still made the right decision... However, if she felt she would still have the balance after that time, she should probably have considered the lower Life of Balance offer.

If you have a question you'd like to put to the Confused.com team, e-mail editor@confused.com and we will do our best to provide an answer. Please note we will feature a question that is also likely to help other confused readers and if you want to offer your own opinion on the topic, post a comment below.