We explain how using your credit cards for a mixture of purposes, such as balance transfers, big purchases and small purchases, can be very costly.
Surprisingly, many people don't know how to use their credit cards. I know what you're all thinking: "That's easy. I'll buy something big and expensive right now to prove that Fool wrong." Please don't! The thing is, we all know how to buy things with credit cards and transferring a balance is a cinch. But, when buying or transferring, we do things that cost us more money than it should, because we don't take full account of the dastardly small print.
The first rule is simple: use the right credit card for the right purpose. If you want to make a big purchase, use a 0% purchases card. If you want to make a small purchase to be paid off quickly, use a reward or cashback card. If you want to transfer a balance, use a 0% balance transfer card.
We have written previously about choosing the right card, but when you decide to use your card for a second purpose, that's when it can go pear-shaped. Most cards, especially the ones with the attractive promotions, have what's called a negative payment hierarchy. This means that the cheapest debt is paid off first (i.e. the one that attracts the lowest interest rate) whilst the more expensive debts remain untouched.
For example, let's say you have a 0% balance transfer card with a £1,000 balance outstanding that you're paying off over a year. You decide to make a £200 purchase with your card, taking your total debt to £1,200. Purchases on your card are charged at 15.9% APR, but you think that you won't be charged any interest because you pay off the purchase straight away.
However, what happens is that the card company deducts your £200 payment from the cheapest debt, which is the balance transfer in this case. Subsequent payments will continue to be deducted from the balance transfer. All this time, the £200 purchase is still on your card racking up interest. Only when you've paid off £1,000 will you start paying off the interest and finally the purchase.
Even understanding this, it's possible to get caught out. If your card is versatile, e.g. if you have a card offering 0% purchases and a low lifetime balance transfer interest rate, you could still end up paying a lot as the balance transfer interest rolls up. So the second rule is: if the card has more than one purpose, choose one and stick to it.
However, this rule can be safely broken with a bit of care. For example, if your card offers 0% deals of equal length on purchases and balance transfers then you should be safe to do both, presuming you pay it off on time. If one of the 0% deals is shorter, you could still do it if you pay off your whole debt before the shorter promotion expires.
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