Three steps to choosing the best credit card

Most UK consumers probably couldn't live without a credit card. This love affair has resulted in a total debt close to £180 billion on credit cards alone.

But despite some bad press, when used properly a good credit card can help you manage your finances whilst benefiting from a range of useful incentives such as cash back, reward points and shopping discounts.

Unfortunately, not all credit cards come with such a rewarding experience and finding a good deal is not as easy as just picking the one with the lowest interest rate. In fact, deciding which is the best card for you will depend on how you use it and whether or not you intend to pay off the oustanding balance each month.

STEP ONE - don't believe the hype

Many consumers are lured into applying for credit cards that promise a rock bottom interest rate, but depending on your personal circumstances, spending habits and financial situation, there may be more important factors for you to consider.

Apart from this it's vital to cover the basics such as reading the small print and understanding the terms of credit deals. For example, a 0% interest rate may only last for the first six months, and then rocket to 19%. Be particularly aware of store cards offering large discounts off your first purchase but charging a prohibitive 29% plus interest rate.

STEP TWO - decide how you'll use your credit card

A credit card should work for you so to match the right card to your needs you need to decide whether a particular card fits with your spending and repayment habits. Otherwise you're likely to end up paying more than you need for the privilege.

If you have existing credit card debt you might consider transferring the balance to a card with an introductory 0% interest period on balance transfers. This means all repayments you make will instantly reduce the debt you owe. There are still lots of cards that offer 0% interest on balance transfers for 6-12 months. However, many now charge a fee of 1-3% of the transferred balance so check this out first.

Some cards still offer 0% interest rate periods on both balance transfers and purchases. Ideal if you want to transfer a balance but also use the card for spending. These cards are becoming rarer and most charge a balance transfer fee.

If you don't want to keep swapping between 0% deals, look for a card with a low APR . The APR is the cost of borrowing on the card and comparing APRs is a good way to compare different credit card companies.

If you pay off your balance each month then the interest rate becomes irrelevant and you should look for a card with no annual fee and that offers cashback or other benefits. Some cards pay you 1-2% of the amount you spend each year while others offer shopping discounts, airmiles or points which you can redeem.

If you rarely or never repay the full balance your best bet is a card with an introductory purchase rate or a permanently low standard rate.

A credit card with a low standard rate will help to save you money if you can't be bothered switching every time the introductory period expires. In addition, if you've accumulated debt on your existing card then it's time to consider switching to a credit card also offering a low balance transfer rate.

Depending on the deals available to you, using two separate cards for your purchases and balance transfers is worth considering. If you do opt for an introductory rate then you'll need to change to a new low rate credit card once that deal ends, otherwise you'll pay interest at the standard rate. There are cards with long-term balance transfer deals and if you think you'll be a bit slow to switch then these may be your cheapest option.

If you have never had a credit card, personal loan or any type of borrowing, you may have no credit history. This will limit which credit cards you qualify for as their is no record of your credit worthiness and no way for card companies to assess the risk in lending you money. The easiest way around this is to apply to the bank where you hold your current account as you will have some financial history with them.

Although banks rarely offer the best interest rates they do provide student credit cards with low spending limits that can be used to establish a credit history. After a few months, you may have sufficient history to successfully apply for a card offering a more competitive interest rate.

A bad credit history including CCJs, arrears or defaults will undoubtedly limit your credit card options. However, some providers will consider giving credit cards to applicants with poor credit under certain conditions. You may have to pay a higher interest rate and manage with a lower credit limit.

STEP THREE - what to do if you're turned down

If your credit card application is declined its important to know why. There may be information on your credit file that is out of date or just plain wrong and it will effect all future applications for credit.

First, ask the credit card company why they refused your application. Not all credit companies will tell you but if it's something obvious it will save you money. If you're still no wiser you can apply to a credit reference agency for your full record. Credit reference agencies provide a detailed analysis of your financial history to credit, loan and mortgage companies so you see what they see. It will show your past repayment history, any defaults or arrears registered against you, electoral roll details and previous credit searches made by companies you've applied to.

One of the main credit reference companies is Equifax. You can view your credit file with Equifax for only £16.95.