Why do companies offer free gifts?

This is a simple marketing ploy to attract new customers in the hope that they will then build up debt on the card and incur interest and fees, leading to an overall profit for the card provider.

However, there are plenty of opportunities for sensible consumers to benefit from these offers by taking out the card, grabbing the free gift and then cutting up the card to avoid incurring any charges.

How to make the most of reward cards

Many card providers require a minimum spend on the credit card in order to become eligible for the free gift.

Simply spend the minimum required amount on something you would have bought anyway, such as your weekly grocery shop, then when the bill arrives pay off the balance in full and you won’t incur any interest.

Use price comparison websites to find the best free gifts.  New offers are made available on a regular basis so keep checking if there is something in particular that you want.

Avoid making balance transfers or new purchases on your card.  Remember you have been attracted to this card by the free gift on offer, which means it may not offer the cheapest interest rate for spending or transfers.  If you need a card for these purposes, use a price comparison website to find the cheapest rate or the longest 0% introductory interest rate with the smallest balance transfer fee.

Impact on your credit score

Every credit application you make, whether it’s for a credit card, loan or car insurance renewal, impacts your credit score and therefore your ability to take out new credit.

Therefore, don’t take out a credit card for the freebie right before a more important credit application such as car finance or a new mobile phone contract.

Your credit score is impacted by the amount of credit you have, not just the amount if outstanding debt.  So if you’re no longer using a card, contact the provider to cancel it and close the account.

Remember – there are lots of attractive free offers available, but picking a card for the gift, rather than one which best suits your needs could end up being more expensive in the long run.

Different credit cards have different ways of calculating the minimum payment due, however generally speaking the amount normally equates to around 5% of your outstanding balance or £5, whichever is greater.

So your minimum payment each month is composed of a percentage of your outstanding balance plus the interest that has been charged during the last calendar month. So for example, a £4000 balance on a credit card with an APR of 24.8% has a minimum payment of around £145. Unfortunately £90 of this payment goes to paying the interest charges and only £55 goes towards paying off the balance.

A low interest rate credit card will obviously specify a lower minimum payment while 0% balance transfer credit cards will be lower still.  You can however pay off more than the minimum payment each month and this will not only pay the balance off quicker, it will also reduce the amount of interest you pay over time.

Performing a credit card balance transfer to a low APR credit card will dramatically reduce you monthly minimum payment, but if you can continue paying the amount you pay on your current credit card you can pay off the balance years in advance.

So, when you do your credit card comparison, before applying for a new credit card, make sure you look at how the card issuer calculates the minimum payment. This will give you a fair idea of how much you will be expected to pay each month based on the balance you intend to put on the card, either through balance transfer or future purchases.

But some costs are inevitable and, once you’ve parted with your cash, losing money by not getting what you’ve paid for can be incredibly frustrating.

That’s why it’s worthwhile knowing about the basic protection available to credit cardholders under law. It could just help you get what you paid for.

How did you pay?

The Consumer Credit Act protects any form of borrowing relationship so that includes credit cards and store cards even when you paid off the whole balance in full (i.e. didn’t actually pay for the borrowing at all).

How much did you pay?

The act only applies to purchases over £100 and under £30,000 (although the Consumer Credit Directive should protect up to £60,260).

A ‘purchase’ is defined as one item or a group of linked items. A shopping basket of different goods that comes to £100 altogether won’t cut it but if you buy, say, a pack of ten tickets at £10 each you could claim the whole amount back.

What happened?

Section 75 is designed to protect consumers when goods or services are not delivered or are sold with a pre-existing fault.

In theory, Section 75 means that the credit card provider and the retailer have equal liability when a problem arises. However, there’s a good reason that the archetypal Section 75 claim is made when a company goes bust.

Having a claim accepted is a long process, often made longer by uncooperative or poorly trained bank staff. Attempting to sort the problem out with the retailer or service provider first is much more pragmatic.

Were there any other costs?

Be aware that section 75 allows you to claim for extra costs you had to incur as a result of the faults.

Recently, for example, the Financial Ombudsman Service revealed that it had ordered a credit card provider to pay for a whole new laptop after a consumer found that the one they had recently bought was faulty.

The classic example is that when an airline goes bust while you’re on holiday and you need to buy an extra flight to get home, the credit card provider should cover that flight.

This post was bought to you by Choose.net, a news, reviews and credit card comparison site. Choose.net has a full guide to section 75.