How to be card sharp, by professor of plastic

If you feel overwhelmed by the range of credit card offers being thrust at you in junk mail, advertising and by your own bank, take heart. The delicate art of choosing a credit card is now thought to be complicated enough to merit the attentions of a professor.

He is Steve Worthington, professor of financial services marketing at Staffordshire University Business School, and he has teamed up with GM - the card arm of General Motors, makers of Vauxhall cars - to compile an index to guide confused consumers.

Worthington divides users of plastic into three groups:

• The transactor, who uses a card mainly as a method of paying, and clears all bills at the end of each month.

• The revolvers, who never clear their balances.

• The occasional revolvers, who sometimes pay off all their monthly bills.

Worthington's assessment of cards goes well beyond interest rates, so his 'best buys' won't always match those that feature in tables, such as those carried weekly in Cash, which concentrate mainly on costs.

He takes into account the methods the card companies use to calculate interest, and adds a weighting for 'stealth' charges, such as late payment penalties, and loyalty points schemes.

However, even a study as exhaustive as this does not provide a permanent answer to anyone's ideal card. Changes in the market meant his latest survey, out last month, produced a slightly different recommendations from an earlier one.

Become a card-carrying expert

Apart from a mortgage, the main ways to borrow in the high street are with credit cards, store cards, personal loans, special deals arranged by retailers and overdrafts. The general rule is that overdrafts and cards should be used to finance short-term borrowing, while loans are more suitable for larger purchases that cannot be paid off in a few months.

Competition among lenders in each of these parts of the credit industry has driven rates down across the board. Internet banks Smile and Cahoot, for example, have overdraft rates at 9.9 and 8 per cent respectively (annual percentage rates, or APRs) while Northern Rock bank is charging 9.4 per cent (APR) for personal loans over three years.

But the most vicious competition is among credit card companies, where it is now possible to borrow for up to six months interest free. Capital One Bank and internet bank Egg are both offering interest-free deals. There are now introductory rates of less than 5 per cent from many card providers. This means that, depending on your circumstances and how quickly you can repay debt, cards may be the cheapest way to finance purchases that once might have been financed by a personal loan or overdraft.

John Murray, director of the Credit Card Research Group, says: 'In the past, credit cards were a convenient method of spending, but not of borrowing. Now they compete with any other form of borrowing. You can get long-term borrowing on credit cards that challenges mortgage rates.'

Buying a car on a credit card may even be feasible now, although on any large purchase you need to check for transaction fees, as some retailers will charge for payment by card.

But there's a big 'if' to this rosy view of credit cards. The main problem with them is the flexibility that the lenders love to promote. One particular brand of card was marketed for years as a 'flexible friend', but when lenders talk about flexibility they really mean 'buy now and pay much later'.

Lenders do make money out of you if you don't maintain long-term borrowing on your card; they receive around 1 per cent of each transaction on a card. But the best money is in the interest charged on the cards. For consumers, it all works like a dream as long as you don't stretch the flexibility too far, leaving debt on the card for too long. If you have an expensive card, such as Barclaycard, still charging a whopping 19.4 per cent, and never clear your debt, you will be paying through the nose. But the danger with the new breed of low-cost cards is that borrowers develop a false sense of security. Usually they apply for limited periods and then jump to double-digit rates.

To get the most out of the card deals, you need the discipline, and sufficient income, to keep knocking back the debt.If you want to borrow over a longer period, don't look just at the short-term rate on a card: consider the standard rate as well and compare this with rates for personal loans.

Borrowers who find that they cannot keep up with payments on a string of cards may be encouraged by their bank manager to take out a personal loan to repay the whole debt. If your cards include some that charge annual rates of around 20 per cent, and you cannot pay them off in, say, a year, a loan may work out cheaper. But it is better not to get into this position, and if you do decide to borrow to repay other debt, cut up the cards.

Whether plastic is fantastic depends on knowing that you have the means to repay the cards quickly - and on understanding how the cheap deals work.