FOOL'S EYE VIEW
Credit Cards: Weapons Of Money Destruction!

By Cliff D'Arcy
July 22, 2003

Yesterday, we wrote about Britain's most expensive credit cards, revealing that there are dozens (perhaps hundreds) of credit and store cards charging interest at between five and ten times the base rate. In my view, it's impossible to justify charging consumers rates of 18% to 32% APR when banks are borrowing at just over 3.5% a year.

I believe the road to financial hell is paved with plastic: plastic cards, that is. Most of us know that credit cards are WMDs (Weapons of Money Destruction), but we have developed an enormous appetite for them, especially in recent years. In fact, I think that we've completely lost control of our credit cards, as these figures show:

• At the end of May, we owed around £49.5 billion on our plastic, and we'll probably clear the £50 billion mark this month.
• During 2001 and 2002, we increased our card debt by £13.7 billion.
• Over the year to May 2003, our card debt increased by over an eighth (12.9%).
• Over the last ten years, our card debt has increased every single quarter without fail - that's forty quarters in a row.
• In April 2003, there were 62.4 million cards in issue, up 11% on April 2002 (almost two per cardholder).
• Last year we spent - wait for it - £117 billion on plastic - eek!

Statistics provided by the Bank of England and the Credit Card Research Group.

Furthermore, the CCRG estimates that we pay interest on about £38.5 billion - almost four-fifths - of our debt. The average interest rate is around 13.7% (a full 10% over the base rate), which means that we are paying around £5.3 billion every year to enjoy the plastic fantastic!

Let's face it, we're no good at using credit cards and we all need to go on a financial diet. It's time to change. It's time to stand up and be counted. Here's how to tame your credit card tiger:

1. Make smarter repayments (how to cut your interest bill by two-thirds)

Do you pay the minimum repayment on your card on the last day it's due? You do? Oh dear, then you're destined for a lifetime of debt. If you're paying interest at 1.5% a month and your minimum monthly repayment is 2% (£5 or more), it will take you 464 months (almost 39 years) to pay off the typical card debt of £1,600!!!

This simple and affordable change will slash almost 31 years off this lifetime of debt, cutting your repayment period to just 94 months:

1. Work out what your minimum repayment is this month (it's 2% - £32 - in the above example).
2. Set up a monthly standing order from your bank account to your card for this flat amount.
3. If you can afford higher repayments, pay more (say 3%, 5% or 10% flat) and be debt-free rapido!

This table shows the dramatic difference this tiny change makes:

Time to repay                Interest   Total
A. 464 months at 2% reducing   £4,266   £5,866
B. 94 months at 2% flat        £1,380   £2,980 (interest bill two-thirds lower!)
C. 47 months at 3% flat          £635   £2,235
D. 24 months at 5% flat          £317   £1,917
E. 12 months at 10% flat         £203   £1,803

So, ignore the repayments shown on your statements, because minimum monthly repayments make you poor and the lenders rich. Tackle your debt with flat repayments by standing order, and watch it take a battering! Alternatively, learn how to demolish your debts with a snowball.

2. Pay early, not late (accelerate your repayments and save even more)

Another thing you should forget about is the 'payment due date' on your monthly statements. Don't wait until the due date to make your repayment, pay as early as you can (such as on payday) to save even more interest. The earlier your repayments hit your account, the more interest you'll save.

For example, making a repayment one day before it falls due reduces the interest bill on that repayment by one day. So, if you pay interest at 1.5% a month and repay £50 twenty days before your repayment falls due, you will save an extra 50p that month (£50 x 1.5% x 20/30 = 50p). Accelerating your repayments (paying as early as you can, not as late as you can) makes a real difference over time.

3. Don't withdraw cash on credit cards (you get walloped!)

The only time you should withdraw money on a credit card is in a dire emergency, such as being stranded far from home with no other way of getting hold of cash. This is because you get charged a cash withdrawal fee (up to 3%, minimum £5), so it can cost you £5 to withdraw a mere £20! What's more, there is usually no interest-free period on cash withdrawals, so you start paying monthly interest at anything up to 2.5% from day one.

Cash on credit cards is a no-no: the best thing to do is to destroy your PIN notification when it arrives. That way you'll avoid temptation.

Also, beware of credit card cheques: many lenders treat them as cash and charge usage fees (up to £30 per cheque, in some instances). If you're arranging a balance transfer with a cheque, make sure there's no charge. If there is, try arranging the balance transfer online or by telephone, as most lenders don't charge for balance transfers via BACS.

4. Dynamite your debt with interest-free balance transfers

This is absolutely the best way to tackle nasty card debts. In a quick Internet search, I found over fifty cards offering 0% interest on balance transfers for intro periods of between five and nine months.

5. Some tips for the sensible

If you never borrow on your cards, why not get paid for using them instead? Shop around for a card with the highest cashback or most lucrative reward scheme:

• The Amex Blue card pays 2% cashback for three months, then 1% thereafter.
• The Circle Rebate card from Capital One pays 1% cashback on all purchases.
• With the Goldfish card, you earn one point for every £1. Points can be used to reduce British Gas and Television Licence bills or be exchanged for shopping vouchers. One point is worth 0.8p to 1p, depending on where it is spent.
• NatWest offers one air mile for every £20 spent.
• Buying goods in Tesco with a Clubcard and a Tesco credit card earns you three points for every £2 spent.
• Halifax Classic and Platinum cards offer £50 cashback if you use the card three times in the first month (money for old rope)!

However you use your cards, there's always room for improvement, so why not shuffle your deck today?

Find a better Credit Card