Credit & Debit Card Q&A special: How credit scoring works, best 0% deals, stoozing, top cards abroad

0:04Hello, I'm Martin Lewis and this is the cunningly named The Martin Lewis Podcast. I do wonder what that's all going to be about. Now, usually much of it comes from my BBC Radio 5 live show with Adrian Childs, but this is a pod-only credit and debit card special. I'm doing it all on my tod, taking you through a plastic fantastic masterclass and answering, I hope, a host of your questions. In this pod, how to slash the cost of your credit card debt. What are the top cashback credit cards? Credit score myth-busting. The little known things they look at, such as your debt ratio or your credit utilisation.

0:43The top cards for spending abroad. And the powerful consumer jujitsu you only get on credit and debit cards. Yes, Section 75 and Chargeback, huge consumer self-defence tools. They mean your purchases are far more protected. And there's lots more too. The best way to find out is listen to it. So let's play the theme tune.

1:23So let's get into it. I'm going to start with some of your questions. Let's do some general ones to begin with. The first is from Claire who says, what's the best first credit card for a new graduate please? And I've deliberately chosen this because it's an open question and I can't answer it because there is no best credit card. Credit cards like fire are a useful tool when used right and use them wrong and they burn. So you have to be getting the right credit card for the purpose that you need it for. Now this question, best first credit card for a new graduate please, I don't know what you want to use it for.

2:01Do you need to borrow? Are you using it to build a credit score? Or are you doing it because you want credit card rewards? They would be the three main categories that this falls into. And within rewards is other perks like cheap overseas spending. So let's just go back to basics here for a moment. A credit card has two purposes. The first is it's a way to spend. It's a transactional card. It's something that you can pay with. The second is it's an open-ended borrowing facility where you can continually borrow up to a limit and you're usually charged interest. That interest now is typically 25 % APR which means if you had a static balance of a thousand pounds on it over a year you'd pay 250 quid interest.

2:44Nobody does have a static balance of a thousand pounds and you'd pay some off but that's just the theoretical thing. But sometimes you can do it at zero percent which means it's interest-free borrowing and we will talk more about that. So you can use cards for either of those two purposes. You can do it just purely as a debt thing, almost like a loan where you make one big transaction on the credit card, hopefully at 0%. You then don't use that credit card again and you've got whatever you've paid for on the card is eventually you're borrowing at 0 % and you're paying it off within the 20-month 0 % period.

3:16Then it's a pure debt card. You're not really using it as a transaction card apart from the first transaction. Alternatively, we can neuter its debt and its interestability by paying the card off, and you've all heard it before, it's me catchphrase for a reason, in full at the end of each month. If you pay the card off in full, and that means you've got£1 ,000 on the card, you pay£1 ,000, don't pay£999 because then you'll still pay interest on the entire£1 ,000 for the month. If you pay the card off in full, on your spending debt at least, and there are some complexities for other types of debt, you won't pay any interest.

3:50So if you were to set up a direct debit to clear the card in full each month, and you should now always be allowed to do that, then you're simply using the credit card as a transaction card, using it as a way to spend. And then once you've done that and you're not paying interest, then you can choose, do I want it for rewards? Do I want it for cashback? Do I want it because it's given me Section 75 protection? More on all of those coming later. Or do I want it because it gives me cheap spending overseas. So when you ask me what is the best first credit card for a new graduate, I don't know because I don't know what you want it for.

4:21But I hope if you continue to listen through the podcast, then you'll get an idea of what you want it for. And I will be telling you lots of different best buys and best cards as we go through a little bit later. So keep listening, Claire. And just the fact you're a new graduate, I mean, you're now, there aren't many graduate credit card offers. Most of them are just straight credit card offers. You'll be hopefully have an income, you'll be a working person, and therefore you're just looking for the best credit card for you. So that was my big broad brush opener. Hopefully that made the sense.

4:50Let's start to get into it. Another general one here from Dimgeo Dim. Simply explain that the only situation where using credit cards makes sense is when you pay off the full balance every month, avoiding any interest or charges. Even 0 % interest offers can be dangerous as they often lead to people accumulating debt. Well, I think I have already done that to an extent, but I'm going to disagree with you, Dim Geo Dim. Look, we live in a world where sometimes people have to borrow. I would hope when people are borrowing, it's for a planned, budgeted-for, one-off item of spending. Using a credit card at 0 % to willy-nilly fill gaps in your income, exactly as you say, is dangerous, can potentially lead to a debt spiral, even if it's at 0%, because if you haven't got the money to pay it off, how are you going to pay it off once that 0 % ends, and you've got to make minimum payments each month.

5:42But using a credit card as an interest-free way to borrow can be a very sensible move as long as you follow the right recipe of doing it for the right purpose and making sure you pay it off before the 0 % ends, and it is a calculated, budgeted for, planned operation. So I agree to an extent, I disagree to another extent.

6:02So, let's go into the next chapter, one of the big ones, on debt and balance transfers. And you've asked me a series of questions there. We'll start with Dorata, who says, what's the best credit card to switch to with a transfer? So, she's talking about, I presume, Dorata, is she? She is talking about a balance transfer. Now, that is a specific credit card deal where you get a new credit card which pays off the debts on your existing cards for you up to the credit limit or usually up to 90 % of the credit limit. So you now owe the new credit card but hopefully at 0 % interest-free for a set period.

6:38And it is absolutely the powerhouse move that everybody with existing credit card debts that they're not clearing each month that they're paying interest on should be looking at. You should be looking to see if you can get a balance transfer deal. Do not confuse it with a 0 % for purchases deal. That's completely different. It's a balance transfer deal that you are looking for. Now, Dorato's asking me what the best credit cards are. Well, the honest truth is the best credit cards, I could give you a Best Buy list. I'll do it in a moment. But what really matters is which card will you be accepted for?

7:11What is the best card that you can be accepted for? Almost a personal Best Buy list. And these days, there's a way to find out that does not impact your credit file because it does a soft search. So you'll see it on your credit file, but it doesn't count as an application, which means it doesn't lower. I'm going to call it your credit score. You don't actually have a credit score, but we'll call it your credit score in common parlance. It doesn't lower your credit score. To do that, you go onto an eligibility calculator. The easiest way is to go onto a site, a comparison site, which will give you an eligibility score for lots of different cards.

7:40Effectively, they're giving you the chance of acceptance for different cards. So sometimes you may even get pre-approval where you know you're pre-approved for a card and you'll just be able to automatically get it. sometimes you'll be given a percentage score, you know, 60, 70, 80 % chance. So you can hone in on a mix of the product details, the card details itself, but also your percentage eligibility score. But it's always worth saying on eligibility scores. Some people get in touch with me and they say things like, I only got a 20 % eligibility score. There's just no point in applying. That's not correct.

8:10If you need to do a balance transfer, it's a very important thing for your finances. It's cutting the cost of your debt. A 20 % eligibility score means two in 10 people in your circumstances will be accepted. You may as well go for it. If it's important, go for it. You might be one of those two in ten. Anyway, Dorata's question was about best buys. Let me run through them very quickly. I'll just give you a selection. The longest 0 % balance transfer cards on the market are BarclayCard and Tesco, both offering 32-month 0 % with a 3.19 % fee. What that means, it's a one-off fee of the amount of debt that you shift.

8:45So if you had£1 ,000 debt that you were shifting, then when you shift it because of the fee, you would have£1 ,031.90 debt that would be at 0 % that you had 32 months to clear. There's also an HSBC card that's up to 32 months 0%. What that means is some accepted customers only get 26 months 0 % with a bigger 3.49 % fee. But I'm going to go right to far, far shorter to highlight something else for you. There's another Barclay card that's up to 14 months 0 % with no fee. So if you can clear the debt very quickly, well, because there's no one-off fee, that would be cheaper. Although not every customer gets 14 months, some get seven months.

9:28So my general rule when you're picking balance transfer cards is you want to go for the card with the lowest fee in a time that you're certain you can clear the debt. So clearing the debt's more important. Go longer if you think you may need it. And if you're unsure, just go for the longest card because the one-off fee is trivial compared to the interest that you will be charged once the 0 % ends, which is now typically around 25%. So you want to make sure you clear that card before the end of the 0 % period. Make sure all the debt is gone. Make sure you never miss a monthly repayment or you can lose the 0 % as well.

10:06Don't spend on this card. This debt is usually just cheap for debt shifted to it. It's not cheap for spending on the card and make sure that you shift that to normally within the first 60 or 90 days because that's the opportunity that you get. So that's balance transfers. Next question is from Claire Devine who asks, take the balance transfer to another 0 % or pay it off? Safest answer, pay it off. If you've got the money to clear a 0 % debt, just pay it off. You're debt free, you're far better off, you can get on with your life. Sophisticated, financially savvy, people who know how to play the game answer, keep it at 0%, take the money you've got to pay off the card, put it in the highest interest savings account you've possibly got so you can be currently earning 5 % in a cash ISA, make sure it's easy access so you can take the money out to clear the card whenever you like.

10:53And that's technically called stoozing. You're deliberately creating a 0 % debt in order to earn interest on the money that you're not paying off, but you could pay the card off at any time you wanted. If you are going to do that, then you want to make sure you really minimise the fee or that would hit into any game. But for most people who don't play the game, just get rid of the debt. Clear the debt. Joe has a comment. Cut costs on credit cards, pay off in full every month. Shops often have finance options that are way cheaper than the extortionate amount of interest credit cards charge you.

11:25Again, general principles, I'm somewhat in agreement. However, I do disagree. Most of the buy now pay later options you have out there are interest free for three months. You contrast to that to the longest 0 % credit cards. You've got M &S Bank on spending. These are spending, so not balance transfers. This is when you spend on the card borrowing. You've got 24 months 0 % Barclay card up to 24 months 0%. Lloyd's up to 21 months 0%. They also have the advantage that A, credit cards are regulated. So if you have a problem, you can go to the financial Ombudsman, Buy Now Pay Later is not currently regulated.

12:02That should be coming in at some point. It has been announced that it will be regulated, but it isn't currently. And you also have the advantage that credit cards have Section 75 protection. Now, at this point, I want to break in and just talk about the protections that you get when spending on plastic that you don't get when you spend by cash or by cheque or via bank transfer. And it's very important to understand that that is one of the things that makes plastic fantastic, these extra protections. There are two of them. The most powerful, the real consumer voodoo, is called Section 75, Section 75 of the Consumer Credit Act.

12:46And it states that if you buy something on a credit card and it costs between£100 and£30 ,000, the credit card company is liable for the entire amount. And it's in fact jointly liable with the retailer. All the rights you have with the retailer, you have with the credit card company. And crucially, this applies even if you paid for any amount on the credit card. What do I mean by that? Well, you put one P of a thousand pound purchase on the credit card and you pay the rest by bank transfer. The credit card company is liable for the entire amount, not just the penny. And I've had examples where someone put a deposit for a kitchen of£100 and the kitchen was£16 ,000 on a credit card.

13:27The rest was paid by bank transfer. The kitchen company went bust. They went and asked for the credit card company for the money back. The credit card company said no. They went to the financial ombudsman service and they were awarded all of the kitchen money back because you have to use a credit card, not use a credit card for the entire purchase. So it's incredibly powerful. And section 75 means, as I've said, the credit card company is jointly liable with the retailer, jointly. You have a choice whether you go to the retailer or the credit card company for all of your rights, including faulty items.

13:58Now, usually it's far simpler to go to the retailer, so I would, but you can go to the credit card company, especially useful if it's something that you bought abroad. But equally, and it's also good, of course, if the retailer's gone bust and you've got the credit card company as your backup option, and that's when people tend to use section 75. But equally, it is worth noting that if you have a dispute over a faulty product with a retailer, you'd have to go to court, which judges on the law. If you have a dispute over a faulty product with a credit card company, and they will often try and push you to the retailer, but they don't have a right to, then you can take them to the Free Financial Ombudsman Services, which looks at the law and looks at fairness.

14:35So it can be easier to get justice at the ombudsman than it is to get justice in the court. So remembering Section 75 is crucially important. Now, for cases on plastic where Section 75 doesn't apply, so credit card transactions under£100, for example, or all debit card transactions, you've got chargeback. Now, chargeback, you normally need to be spending over£10. It does depend whether it's Visa, MasterCard or Amex, because this is a rule of Visa, MasterCard or Amex that's effectively set up to say, if you paid for something on one of these cards and you didn't get it, and almost all cards, debit cards and credit cards, are Visa, MasterCard or Amex, if you paid for something on one of these cards and you didn't get it, then you should be able to get a refund or you should get your money back.

15:18Or if you paid for something and it wasn't suitable compared to what you asked for, you should be able to get your money back. Now, the way you do a chargeback is you ask your card firm, so that could be your bank if it's a debit card, your credit card firm if it's a credit card, to do a chargeback on whoever you paid merchant account, the retailer's account if you like. So you say, I want you to do a chargeback. So they're asking for the money that you pay to get it back and it gets put back into your account. And chargeback is also a strong protection, not as strong as Section 75, but a strong one.

15:51Ironically, even though Section 75 is stronger, sometimes you may find it easier to get a chargeback done by your bank or credit card company because they're asking another company to give them the money. Whereas on a Section 75, then it's the credit card company itself that is giving you the money back. So sometimes they might prefer to do a chargeback. You don't give the monkeys as long as you get the money in your pocket. But that's why paying on plastic gives you a lot more powerful protections than paying any other way. So you don't get this protection when you pay by cash or check or by bank transfer or by now pay later.

16:28You only get this on debit or credit cards. My next chapter is on your questions on credit scoring and there are a lot of them. So let me just give you some basics before I get into answering the questions because it'll help me get through. So there are a lot of myths and misunderstandings out there about how credit scoring works. The first thing to say is you do not have a credit rating or a credit score in the UK. There is no single number that dictates if a lender will accept you. Each lender scores you based on its own wish list of what is a profitable customer. And that's crucially important to understand.

17:06Now, I know that some people will be saying, hold on, hold on, hold on. I have a credit score, I know what my credit score is. No, what you've done is you've gone to a credit reference agency and it has done an assessment of you looking at the data on your credit file to say this is how a typical lender may look at you. But each lender does score you differently. Now there are some lenders who might take some of the information from the credit scoring system and factor that into their score. But it's important to understand there is no universal system going on here. So when people get their credit score from a credit reference agency and they get in touch with me and they say, my credit score has just moved by three points.

17:51Actually, three points is neither hidden or tiff or it's just a loose indication. If it dropped by 200 points, there's clearly something substantial going on. But if it's moved by a few points, I wouldn't sweat it because it isn't an actual thing. It's just an illustration of what's going on with your credit scoring situation. So carrying on in the podcast, I am going to use the phrase credit scoring to dictate what a lender does when you apply. But ultimately, there is no one credit score that you have. Now, what does matter in credit scoring is your credit file. You should check it annually and before you do any applications.

18:26Your credit file is the one that lists key information, the products you've got, if you've paid them on time, any court rulings or electoral roll information about you. And you should go through your credit file line by line. Even small errors can mean rejection. If you're just doing a general check-up, then checking one agency is fine because errors tend to be similar on all of them. But if you're making a big application like a mortgage or an important balance transfer, I would check all three agencies, which are Equifax, Experian and TransUnion. And there There are ways to check your file for free on all of them.

18:59In fact, you have a statutory right to do it. There are ways you can do it for free online digitally with a few different ones. I'm not going to spend time on that. Final point, my final myth bust on credit scores is you can still be rejected even if you have a perfect credit score. When you apply, firms use the information from your credit file. That's what's going into the credit score you've got. The information that you've put on your application form, well, that isn't in the credit file. so that's different information, and information from any past dealings that specific firm may have had with you.

19:32Now, the important thing that is on your application file that is not in your credit score is a really, really big one. It is, wait for it, your income, how much you earn. So let me explain this in a really plain way. If you're applying for a£10 ,000 loan and you have no income, you're going to be rejected even if you have a perfect credit score because you failed the affordability test. So don't think that your credit score, especially the illustrative ones you're getting from credit reference agencies, is the be-all and end-all. OK, having done all that, let's go into your questions. Angela says, what's the best credit card for young adults to help with building credit scores and how best to use it?

20:18Well, the answer is anyone that they can get. There's a catch-22 when it comes to credit scoring. The way that credit scoring works is they look at all the information that they have on you in order to try and predict your future behaviour. So you can get rejected for a number of reasons. One, if your past behaviour makes it look like you'll behave poorly in future, you might be a high risk or a non-profitable customer. Or two, simply because they don't have any data. If they don't have any data on you, they can't predict your future behaviour, so they don't want to take a risk. And that's the problem for many young adults starting out on independent finance.

20:53And so in this weird way, you have to have credit to get credit. So how do you get credit in the first case, which is what Angela's question is all about? Well, you get any card that you can. Now, most young people are going to be rejected for most mainstream cards because they fail the credit score. So you want a credit rebuild card or a credit building card. card, and I would simply go onto an eligibility calculator, put the details in, and find out which credit building card you're going to be accepted for. Once you get one of them, what you then do is I would spend around£50 a month on it, making sure you pay the card off, block your ears, IN FULL every month, so that there's no interest cost to you.

21:34I mean, paying it off in full each month won't necessarily improve your credit score, it just means there's no cost to you. And by paying£50 each month and paying it off on time, do it by direct debit so you're sure you're never missing or being late on a payment, you will start to build yourself a history as a good credit citizen, which will in future enable you to be able to get other forms of credit. Now, if you wanted to be really clever, you'd get the first one, you'd have that a couple of months, then you apply for a second rebuild card, you'd have two of them working in sync, and you'd be putting£50 roughly each month, just normal spending.

22:06I'm not saying false spending, go and do whatever shopping you're doing in the supermarket on it. Just put about 50 to 100 quid on each card, pay that off in full, and that can help you build your credit history more quickly. My one caveat here though, this is great for sensible young people who understand finance and understand that they're doing this tactically as a way to build credit in order to help you get a future mortgage or any other form of borrowing that you may need. Where it's really bad is somebody getting one of these credit cards are not understanding that this is debt and that if you spend on it and don't pay it off, you're going to get yourself into debt, you could hurt your credit score, and it could stop you borrowing for many years in future as well as being really expensive.

22:45So I don't know, Angela, whether this is for you or I don't know whether you're a parent asking for your child. It's very important to consider, can you handle the plastic or is it too hot for you to hold, in which case it's safer just not to do this and to put it down. Next question. NatStig applied for a 0 % card that I was pre-approved for last week. I have a very good credit rating and excellent affordability, but I got turned down. Orcs. That's NatStig's Orcs, not my Orcs. I'm not sure I'd throw an Orc in. What on earth did they look at that wasn't in the pre-approval? Well, if you've been pre-approved, that means you've passed the credit score.

23:22The next stage after pre-approval towards getting the card is generally an ID check. So certainly from everything you're saying, you've got a good credit rating. Credit ratings don't exist, but I know what you mean. And excellent affordability. Why have you been turned down? There's an ID error going on here. Now, this could well be that your address might even have a different format to the one that they've got on their files. I'd go get your credit files. I would check on your credit files exactly what address details that they've got for you there. There's something going on with matching up your ID with the data that they hold on you, and you need to go and check that out.

23:58Next question is Fleetwood Fox who says, if you've paid off a credit card, should you close it down? Or if you've transferred the balance to another card, should you close the previous card? Wow! What a question and it's way more complicated than you think. So the first thing, the simple thing is, some card firms like evidence of longevity. So closing down a card and lots of change going on in your file is seen as a negative. So that is one aspect for keeping it open. and others would prefer you to have less available credit. So that's quite good. But this gets complicated. And this is a good point for me to get in to the underbelly of how credit scoring works.