Credit cards are actually a building block for personal finance and could help you to save thousands of pounds a year in interest payments.

But, there are so many cards to choose from, you could end up setting yourself a debt trap. Don’t panic, here are a few simple ways to make sure your cards work for you.

The right card for you

There is so much competition within the credit card market that it is very difficult to know when you are faced with a good deal.

Offers of ‘interest-free’ periods and low ‘annual percentage rates’ (APR) weigh down the postman’s bag every day, and while most of them go straight in the bin, the occasional few appear to be too good a deal to miss.

But are they really that good?

The main thing to look at is the APR, because this is what you will pay on any debts and will help you to get a realistic idea of the cost of credit.

It takes into account both interest rates and any other charges, such as a yearly card charge or a charge for borrowing cash.

With no annual fee, the APR is simply the monthly rate compounded over 12 months, make sure you know if this is the case, because ‘compounded’ means that you will pay interest on your interest.

For example, a monthly rate of 1.5 per cent, compounded over 12 months gives an APR of 19.5 per cent.

Is ‘interest-free’ really free?

There are two main options that you will be faced with when you are searching for that perfect credit card, and you must be careful to choose the right one.

Credit card companies now offer an interest free period on balance transfers or purchases, and an occasional few offer it on both, such as the Halifax One card.

If you are transferring an existing debt, then it would probably be better to opt for an interest free period on the balance transfer, giving you a certain amount of ‘free-time’ to pay off the debt.

However, if you are addicted to paying with plastic, then it would be wise for you to choose a card that offers an introductory ‘interest-free’ period on purchases.

Interest-free periods are a useful way to cut down the cost of borrowing on your credit card, without one you will pay interest on the time between making your purchase and paying your bill. Depending on the company, this period can be anything from 28 days to 56 days.

You have to be careful about when you buy things, because if you leave it too late in the month, the item may end up on the next statement, and gaining interest.

So, is it really free? With borrowing money there is always a cost, but if you are careful about what you spend and the type of card you have, then you could definitely save money and avoid that debt trap.

Introductory Rates, balance transfers and special offers

With the market becoming more competitive, credit card companies now usually offer and introductory rate that is lower than the standard interest rate for a specified term.

Balance transfers have also become more common, because they make the process of switching accounts a lot easier, and with the market now so competitive, they are usually offered for free.

In some cases a balance transfer rate is charged, which applies to the existing card debt that is being moved from one issuer to another or a consolidation of other debts.

It might seem strange to choose a company that charge a special rate for the balance transfer when you can get one for free, but it can actually work out cheaper.

This depends on how long you will take to pay a debt off. For example, if you choose a card that has a lifetime balance transfer rate at 4.5 per cent, then you can take as long as you need to pay the debt off and the interest rate will never change.

However, if you choose a free balance transfer, with six months interest-free, then you realistically should have paid off the debt before this six months is up, because the rate then jumps up, usually to around 15 per cent.

Your personal circumstances will determine which type you choose, if the debt is small and can be paid off within the ‘free’ period, obviously that is the card for you.

For cardholders that pay off their balance in full each month, there are other benefits offered, such as cashback and loyalty points.

Cashback is available from many credit card companies, where a cash reward is calculated as a percentage of spending, but is normally only available on purchases.

Loyalty points are a way of gaining a benefit from using your card, such as air-miles, and other cards offer things like free travel accident insurance and discounts on holidays.

Getting cash and using my card abroad

You should never use a credit card to withdraw money because you are instantly charged a fee, usually based around £2.50, each time.

And, on top of this you pay interest on this cash from the instant you withdraw it, surprisingly it would be cheaper for you to go overdrawn.

Another way to pile up that debt would be to use your card abroad, where companies usually charge foreign currency loading.

This is a charge applied to any purchases and cash withdrawals that aren’t in UK Sterling, and most are set at 2.75 per cent.

But, this isn’t the only charge, remember, that if you withdraw cash, you will be charged the typical rate of around one or two per cent – between £1 and £2.50.

So if you withdraw £100 for example, you could potentially be paying almost £5 in charges.

Store cards

These are a form of credit card, but are provided by a retailer and can only be used with that particular retail group.

With some store cards you will be offered a reduction on your first purchase as a way of getting you to take out the card.

However, store cards are usually more expensive than other credit cards, Debenhams, for example, charge 28 per cent APR, and if the balance isn’t paid off each month, your outstanding debt will spiral out of control very fast.

The best advice here would be to avoid store cards at all costs, especially now that most places accept Visa and MasterCard.

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