Before you fill out a credit card application, you need to decide what type of credit card is the best for your own situation.

Standard credit cards

If you want a card to spend on, and you know that you are not likely to repay your balance in full at the end of each month, your main priority should be the interest rate. However, finding out what you will pay in terms of interest is not as simple as just looking at the headline rate. Astonishingly, when it comes to credit cards, the lowest APR (annualised percentage rate) does not necessarily mean the lowest charge, as there is no standard interest calculation method. The card companies refuse to adopt a standardised method of calculation, claiming it is a commercial issue. There are 14 methods of charging interest on a credit card, so simply looking at the so-called APR is all but meaningless.

Use a credit card calculator to find out which card offers the best deal for you.

If you pay your balance in full each month, the interest rate is irrelevant. You should look at other charges, such as fees for use overseas (see below), and you can afford to take account of rewards programmes and perks such as gift vouchers and cashback.

Never use rewards programmes as the deciding factor when choosing a card if you don’t repay in full each month. A poor interest rate will far outweigh the value of points.

Balance transfer cards

Card companies trying to attract customers often offer balance transfer deals. This means that you can move the debt you have run up with one card on to a card offered by another, cheaper provider.

The best deal is a 0% balance transfer deal with no fees. With this type of offer you can move your debt to the new card and pay absolutely nothing in interest until the deal comes to an end. (You still have to make minimum payments, of course.) These are all but impossible to find, and to transfer your balance you will usually have to pay a fee of between 2.5% and 3% of the balance transferred. Never spend on a balance transfer card.

0% on purchases

A card with a 0% rate for purchases is well worth having, as it amounts to a free loan from the card company. But do make sure you are able to pay off the debt when the free period comes to an end. The best plan is to put money aside in a savings account and pay off the debt all at once. The reason for this is that “0% on purchases” often have a high underlying interest rate and you will be hit with this immediately the free period finishes. If you don’t pay the money back straight away you could end up paying more in interest than if you had a normal credit card and paid the debt off bit by bit with no interest-free period.

Low-interest life of balance cards

These cards are a compromise between 0% balance transfer cards with a fee and a normal credit card. They are a card suitable for transferring a balance to, but you will have to pay at least some interest on the balance transferred – though not as much as a normal card. It is worth considering one of these if you think you can pay the balance off relatively quickly, and the transfer fee on a 0% transfer card would outweigh the cost of paying some interest. You will need to do the maths to see which is best for you.

As with the 0% balance transfer card, don’t spend on a life of balance card, because of the way the payment hierarchy (see below) works. Usually card companies allocate your monthly payments to the section of your account with the lowest rate of interest first. This means that, if you carry on spending while you are repaying the debt, you are repaying your cheap debt but amassing expensive debt at the same time. Use a different card for spending – preferably with 0% on purchases – while you repay your transferred balance. Better still, don’t spend at all until your debts are cleared.

Credit cards with rewards programmes

These include cards that give you points such as Airmiles, Nectar, shopping vouchers and cashback.

Only ever choose a card with a rewards programme if you pay your bill in full every month. The extra interest these cards charge if you don’t pay in full far outweighs the benefits of rewards.

Cashback is the most flexible, as cash can be spent anywhere. However, shopping vouchers and “combination deals”, where a potential cash reward can be taken as a voucher for a reward of a greater face value, are worthwhile if you will definitely use the benefit.

This last category of combination cards includes the Tesco credit card which gives you Clubcard points. These can either be spent as cash in Tesco stores or can be accumulated and spent on gifts, holidays and days out with a greater value than the face value of the points.

Cards with a fee

It is unnecessary to pay an annual fee for a credit card at present, as there is a wide selection of free cards on the market. Some cards charge a fee and offer special services which you might find to your benefit. Fees range from £2 to £275 a year, but it will probably be cheaper to buy the services that fee-bearing cards offer separately.

The i24 MasterCard, for instance offers 24-hour travel assistance, worldwide travel insurance, lost or delayed luggage insurance, flight delay and cancellation insurance, concierge service, priority pass to airport lounges, £350,000 of travel accident insurance and free purchase protection – but it costs an eye-watering £275 a year.

The one service that may seem attractive is free travel insurance, but do check that the cover meets your needs before you take out the card to benefit from it. Many free policies have multiple exclusions and high levels of excess – the amount you need to pay before the insurance kicks in – and may exclude cover in certain countries of the world (typically outside Europe). In addition, many only cover the cardholder, which means you would need to buy another policy if you are travelling with your family.

'Bad credit' credit cards

This category includes cards such as the Vanquis Abacus Visa card, from doorstep lender Provident Financial, and the Capital One Classic Visa card, which charge interest rates as high as 59.9%.

People with a poor credit history or on low incomes might be well advised to steer clear of credit cards altogether. However, for reformed characters and the cautious, who are confident that they can handle a credit card sensibly, a card can be useful for things like internet shopping, which can be a money-saving way of buying goods. Buying with a card also confers certain consumer rights and protection. If you have a poor record with credit, or otherwise have a low income, you can use one of these high-charging cards to build or rebuild your credit history – as long as you always pay the bill in full each month.

If you are forced to take a card with a high interest rate because of past financial misdemeanours, use it as a stepping stone to getting a better deal. Pay your bills on time and your credit rating will improve and then you can apply for a card with a lower interest rate.

Prepaid Cards

These are not credit cards at all, because you pay for them upfront by “loading” them with cash. They are an expensive way to pay, as there is usually a charge for loading them and there may be other charges for transactions such as using them in a cash machine. However, they can be useful for online shopping, spending overseas where you are worried about going over your budget, or for students, children, the unemployed or people with a bad credit history who need a card but are unable to get credit.

Student Credit Cards

Banks often offer a credit card to students as part of their student package. Barclaycard also markets a dedicated student card with a low credit limit.

Running up debt on a credit card is an extremely unwise thing for any student to do and should be avoided at all costs. Credit card debt is one of the most expensive types of debt and very hard to get rid of once you have started to immerse yourself in it.

The only argument for using a student credit card is the same argument that applies to users of “bad credit” cards – that is for consumer protection, convenience and internet shopping and building up your credit record. In all cases the bill should be repaid every month in full when it falls due.

Store cards

Store cards, as their name suggests, are offered by individual stores for use in their outlets or groups of outlets. However, they rarely offer a good deal and are a quick route to financial disaster. Not only do they charge a penal rate of interest – as high as 29.9% - but signing up to a handful of them could, in the worst case, damage your credit rating.

Stores usually lure you in to taking out the cards with a special introductory offer, such as “10% off everything you buy today”. This sounds pretty attractive, but you need to work out what this is worth in monetary terms. How much are you actually going to spend on the first day? If it’s just a small amount, the 10% of it isn’t going to be a whole lot.

Applying can be easy. Some stores will give you credit before full credit checks can be completed, but you can be sure that all the cards you have applied for will turn up on your credit record.

Because of the credit crunch, which is making it harder for some people to get credit, many store card operators are now insisting on a more thorough credit check, which leaves a search “footprint” on your credit record. Too many of these could damage your record and make it harder for you to borrow in future.

What you need to know

Details about cards you are thinking of applying for are available in the "summary box" that accompanies all application forms.

As well as obvious features such as the interest rate, any special deals such as 0% periods and other promotional offers, make sure you also understand the following:

Payment hierarchy

Most cards, with the exception of Nationwide, pay off the cheapest debt first. So if you have a 0% deal and continue to spend at – say – 15.9%, and you make limited repayments, your debt will continue to rack up because you will be paying off the sum borrowed at 0% first. If you are lucky enough to have a 0% deal, don’t ever spend on that card until the debt is cleared.

Length of the interest-free period

The interest-free period before you need to settle your bill will vary from card to card. Many interest-free periods are as long as 56 days. Other card providers give you a much shorter period, and in one of two cases no interest-free period at all. When you sign up for a card you should find out how long you have from the date of purchase before you need to pay. If you don't pay your bill in full when it falls due, interest will be charged from the date stated in the contract. This may vary from the date of purchase, the date of your last statement, or another period.

Minimum monthly payment

A small minimum monthly payment may seem an attractive feature if you are strapped for cash. However, you should always endeavour to pay off as much of your bill as you can, and preferably all of it, to avoid running up uncontrollable debts. Credit card companies have been cutting the minimum repayment they require you to make. This simply means you pay more interest in the end.

Credit card insurance

You don’t need theft insurance or ID theft insurance – the banking code protects you against misuse of your card and you should not suffer any financial loss as a consequence. Payment protection insurance (PPI) offered by card providers is very often a bad deal: it is expensive and riddled with exclusions. If you must have it, shop around, make sure the policy you are considering is appropriate for your needs and don’t buy it from the card company unless it offers a competitive price. Remember, if you die, any debts such as credit card balances outstanding will be settled by your estate, if you leave any money or assets. If you die penniless your debts cannot be passed on to your family if your accounts were held independently, so don’t feel that you need to buy insurance to protect them.

Find the best deal

How Credit Card Interest is Charged

CashQuestions Guide to Credit Card Hidden Charges

CashQuestions Guide to Balance Transfers

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