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FOOL'S EYE VIEW
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Just like our American cousins, we Brits spend, spend, spend on our credit and store cards. In fact, we're so fond of them that we now owe around £48 billion on our 60 million cards! This works out at around £800 per card and, as we normally have two cards or more, we each have an average of £1,600 in card debt. That amount doesn't sound too bad, does it? Well, it becomes a problem when you consider that the annual interest charged by card issuers is between 12% and 30%. At the top end of this range, you're paying a staggering eight times the base rate of 3.75%, which means fat profits for lenders. With £1,600 of debt at 30% APR, your interest bill is the thick end of £40 a month. So, if you keep your balance at a constant level by spending as much as you repay, you'll pay a whopping £480 a year in interest and your debt will balloon to over £3,500 after three years. Ouch! So, the best way to use your cards is to treat them as a convenience, try not to borrow on them, repay your bill in full every month, and get smart with the following tips. Watch out for hidden charges Cashback and reward points Whenever possible, buy everything - even your smallest purchases - on your credit card for maximum cashback and then pay off your bill in full every month. Please don't pay the minimum every month If your card charges interest of 1.5% and you pay the minimum 2% a month (£5 or more), how long will it take you to repay the typical card debt of £1,600? Fifteen years? Twenty? According to my Excel spreadsheet, it will take a working lifetime - 38 years and eight months - thanks to the curse of compound interest! You'll end up paying back £5,866: your original £1,600 plus a handsome £4,266 in interest. Crikey! On the other hand, if you barely increase your monthly repayment to 3% and fix it at this amount (£48, in this example), you'll repay your £1,600 in only 47 months and pay just £635 in interest.
Time your transactions Become a rate tart (using interest-free balance transfers) Alternatively, if you don't have any card balances, how about getting hold of some free money instead? Instruct your new lender to pay a lump sum onto another card and then ask your old card company to refund your credit balance directly into your bank account. Check carefully that you're borrowing at 0% interest and that there are no charges for transfers or convenient credit card cheques. Some lenders will credit money by BACS transfer into any card, loan, overdraft or bank account, so these lenders will make a payment directly into your bank account with no fuss. Once you have the money, you can earn interest by deposting it in a high-interest savings account or, even better, a tax-free cash mini-ISA. Another great idea is to use it to pay less interest on an offset or current account mortgage. Just remember to pay your lender back after your six months is up! If you intend to keep spending on your new card after transferring a balance, make sure the 0% offer also includes purchases (several cards in our Credit Card Centre offer zero interest on both transfers and purchases for the first six months.) Otherwise, you'll find yourself paying interest at the full whack on your purchases, which rather defeats the object of switching! Also, your repayments normally go towards paying off your cheapest debt first, so your purchase debt keeps growing at a high interest rate . Protect yourself with free insurance The law states that you can only be held liable for the first £50 of fraudulent spending on your card. Some cards offer "fraud protection guarantees" that reduce this liability to zero and often include extra delivery insurance. Both are very useful when buying by mail order or online. Purchase protection: If items bought with your card are lost, damaged or stolen within a specified period (usually up to 100 days from the purchase date), you can make a claim against this cover. It's useful for fragile or high-value goods but never pay extra for it; it should be free. Check the small print to see what's not covered. Price protection: If you buy an item and then find it cheaper in a later sale, some cards allow you to claim back the difference. The usual time limit is 60 days from the purchase date. Claims between £10 and £1,000 are usually valid, often subject to a small excess. Some lenders charge ridiculous prices for this cover but why pay extra for this when you can get it for nothing? Payment protection insurance: This is an amazingly expensive way to protect your repayments if you die, lose your job, have an accident or fall ill. Don't buy it. Other free benefits include extended warranties, which extend manufacturer guarantees, usually for an extra year, and travel accident insurance (not to be confused with full travel insurance). Finally, you can apply online for up to six different "Best Buy" cards at our Credit Card Centre.
Card issuers charge you penalties and fees whenever possible: withdrawing cash, using credit card cheques, paying late, exceeding your credit limit, asking for duplicate receipts or statements and so on. Check carefully before doing (or asking your lender to do) anything unusual.
Using one of the twenty or so cashback cards, you can earn a rebate of up to 1% of the value of your purchases, with some lenders offering introductory cashback of up to 2%. If you spend £750 a month on your cashback card - £9,000 a year - you're earning £90 a year (at 1%) to use your card - pukka!
Please, please, please don't pay only your minimum monthly repayment (usually between 2% and 5% of your balance)!
Also known as "statement planning". If you always pay off your balance in full, are planning a major purchase and can wait a little while, hold off until a day after your next card statement is due (make a note of the date; err on the side of caution). Buying large items just after your statement date means you enjoy the maximum interest-free period available, with up to 59 days to save before paying your big bill.
If you're carrying forward a balance on one or more cards, it's time to switch lenders - there are dozens of fantastic deals waiting for you. By switching to a low-rate or zero-interest card and paying off as much as you can every month, you can really hammer your expensive debts. There are around 40 (that's FORTY) different cards charging 0% interest for the first five to ten months (usually six months) for balance transfers.
Buy anything for between £100 and £30,000 on a credit card and you have valuable rights under Section 75 of the Consumer Credit Act. Essentially, your lender "wears the supplier's shoes": if anything goes wrong, you can seek compensation from your lender (most useful when a supplier goes bust).