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FOOL'S EYE VIEW
By
I have a love-hate relationship with credit cards. Twice in my life, I've allowed bad spending habits to get the better of me and, on both occasions, I ended up with a mountain of plastic debt to pay off. Having learned some painful lessons, I now use credit cards craftily, making them work for me and not the card issuers. Today, I have at least thirteen credit cards although, in my defence, most of these accounts are dormant! These days, I tend to use one of two cards, depending on the time of the month, in order to take maximum advantage of interest-free periods. Even so, being the wrong side of thirty-five, I have difficulty remembering to pay my bills, so I tend to organise monthly repayments as soon as my statements arrive! So, in no particular order, here are a dozen reasons why I treat credit cards with the extreme caution and respect they deserve... 1. Standard interest rates Many widely held credit cards charge extortionate rates of interest. Tens of millions of borrowers have cards that charge interest at over 18% a year. The Bank of England's base rate is 4% at present, so many major lenders charge at least 4½ times as much! There's absolutely no excuse for these inflated rates - it's just pure profiteering. After all, Capital One charges a tiny 5.9% APR on its new No-Hassle Platinum card - the UK's lowest standard rate. Sadly, the people who are being ripped off by these sky-high rates are existing customers. This group should shop around, because the credit-card market is fiercely competitive, with dozens of cards charging no interest on purchases for up to nine months (see our Credit Card centre for some great deals). 2. Minimum monthly repayments I take my hat off to those cardholders who always pay off their bills in full. I'm also encouraged by those people who throw all their spare cash at their card debts every month. However, I fear for the unfortunate folk who can only afford to make their minimum monthly repayments. As this article demonstrates, paying minimum monthly repayments means that a debt of just £1,600 can take up to 44 years to clear! How would you feel if you treated yourself to a widescreen TV on your 21st birthday, and were still paying it off just before you retired?!!! 3. Credit card repayment protection (CCRP) This is payment protection insurance, which pays off your balance if you die and meets your monthly repayments if you are unable to work because of accident, sickness or unemployment. On the surface, it appears to be a very useful safety net but, sadly, it's massively overpriced. I worked for several of the leading CCRP providers over an eleven-year period, yet I've never bought one of these policies in my life - and this article explains why. 4. Fines and other charges Credit-card issuers take great delight in charging us for the slightest wrongdoing. Often, they charge £25 or more to cardholders who exceed their credit limit, make a late payment or have a payment returned unpaid. As this article explains, lenders make tidy profits from our slip-ups, because their charges are many times what they need to impose in order to keep both honest and naughty borrowers in line. 5. Card protection plans In effect, these are a form of insurance designed to help borrowers whose cards are lost or stolen. One phone call and all your cards will be cancelled and re-ordered immediately, plus you are covered against fraudulent spending on your card. The two UK providers are Card Protection Plan (CPP) and Sentinel, which charge around £15 a year for this service. These companies play on our fears of fraud to promote their services, but this is something of a red herring. You are only liable for the first £50 of fraudulent transactions made before notifying your card issuer - and almost all lenders will usually waive this charge for honest cardholders. A close friend of mine - who had spent several years in the marketing department of one of these companies - told me that they were one of the most lucrative financial products ever designed! So, unless you go on holiday with a dozen credit cards in your purse or wallet, I'd give this protection the thumbs down! 6. Direct Debits My grumble here isn't so much about Direct Debits (DD), which are incredibly useful if used sensibly. The problem is that credit-card companies don't want us to pay off our bills in full by DD, because it's an easy way for us to avoid paying interest! Most card issuers do offer cardholders a facility to make minimum monthly repayments or pay a fixed sum by DD, but not to pay off the entire balance month after month. However, if pushed really hard, many will concede that this is possible. So, why not press your card issuer on this subject and demand the right to pay your bill in full by DD? 7. Credit-card cheques These really make my blood boil! Lenders promote them as a quick and convenient way to get hold of easy credit, while hiding away nasty interest rates and processing charges in sub-atomic print! This article explains how to put a stop to a flood of unsolicited credit-card cheques. 8. Cash withdrawal charges Credit cards were designed for use in shops, not cashpoints. So, if you use your credit card to withdraw money from an ATM or over the counter in a bank, you'll be charged for the privilege. Some issuers charge a fee of 3% of the transaction value, with a minimum of £5 – that's a hefty 10% charge if all you want is an emergency fifty quid now and then. What's more, you don't benefit from your card's interest-free period and, therefore, you start paying interest at, say, 1.5% a month from day one. Withdrawing cash on credit cards is just plain crazy - stick to your debit card instead! 9. Foreign transaction charges When you use a credit or debit card abroad, your card issuer will hit you with a foreign currency commission or "loading" of close to 3% of the transaction value. So, if you spend £1,000 on your card during your holiday or business trip, you could find yourself paying £30 for the privilege. One honourable exception to this rule is Nationwide BS, which doesn't levy this charge – and its charge for using overseas cashpoints is a mere 1%, which is half the usual rate. 10. Unsolicited credit-limit increases Recently, I noticed that my longest-serving credit card has seen its credit limit rocket from £3,000 to £12,600 - in other words, it's more than quadrupled! Does this reflect my increased spending? Quite the opposite: I spend far less on my credit cards than I used to in the bad old days. What's actually happened is that my card issuer has pushed an extra £9,600 of credit my way - without even asking me. Marketing managers run repeated campaigns to raise credit limits, in the hope that unwary cardholders will see this 'newfound wealth' as an excuse to go on a spending spree. I agree with the group of influential MPs that recently suggested this practice should be banned. 11. Shorter interest-free periods The most generous credit cards offer anything up to 59 days' interest-free credit. If you time your transactions correctly, you could have almost two months to pay for big purchases. For example, I renewed my annual Travelcard back in February but, as I paid for it on the day after my card statement was generated, I actually only coughed up the money last week. However, I've noticed a trend towards shorter interest-free periods, with some as little as 45 days – which means that you have to stump up your cash a fortnight earlier. (In fact, some specialist cards have no interest-free period at all). If you pay off your bill in full without fail, plump for a card that gives you the full 59 days' grace. 12. Fraud Credit-card fraud has rocketed in recent years, although it did decline slightly in 2003. Cards are stolen before they are delivered, cloned by fraudsters in retailers, copied by modified or bogus cashpoints, card numbers are stolen online - with organised crime syndicates often involved.
And now, the other side of the argument: The Twelve Best Things About Credit Cards! More: Find a better deal in our Credit Card centre.