FOOL'S EYE VIEW
Ten Tips For Cunning Card Players!

By Cliff D'Arcy
June 23, 2005

UK consumers are among the world's biggest credit-card junkies. Indeed, there are around 25 million more credit cards than there are adults in the country (72 million versus 47 million)!

To sensible and financially disciplined users, credit cards are probably the best budgeting aid ever invented. It's when they fall into the wrong hands that the waste hits the fan! In an ideal world, everyone would pay off their monthly card bills on time, with no-one paying interest. However, this world is far from perfect, and millions of cardholders use their credit limits to supplement their lifestyles. And at interest rates of up to 25% a year, credit cards are a hideously expensive way to borrow money, especially over anything other than the short term.

So, without further ado, here are two handfuls of things to watch out for when choosing and using a card:

1. The joy of 0% credit cards

Online bank Egg launched the first '0% on balance transfers' card on Christmas Day, 2000. Since then, dozens of card issuers have jumped on the 0% bandwagon and, nowadays, you have the pick of roughly a hundred different 0% cards. Some cards offer 0% only on balance transfers, others offer 0% solely on purchases, and a few do 0% on both.

It pays to know which card you're dealing with – get it wrong, and you'll pay from your mistake by being hit with eye-opening rates of interest! The basic rules are: don't spend on a '0% on balance transfers card', don't transfer balances to a '0% on purchases' card, and feel free to do both with a '0% on both' card. Learn how to play the 0% game and win in From 30% To 0% In Sixty Seconds!

You'll find several Best Buy 0% cards in the Fool's Credit Card centre.

2. Watch out for balance-transfer fees

As 0% cards have grown in popularity, they have given lenders a financial headache, because they lose money on these deals. This led some commentators to predict the end of the 0% debt-transfer game. I disagreed but, last December, I predicted that more and more card companies would claw back some of their losses by introducing balance-transfer fees.

My forecast was spot on, with several major card firms now charging a fee of around 2% per transfer, capped at £50 or so. These include Barclaycard, Egg, MBNA (which includes Alliance & Leicester) and Royal Bank of Scotland (which includes MINT and Tesco Personal Finance). However, there are still dozens of fee-free 0% balance-transfer cards around, so only pay a fee if the rest of the deal stacks up.

3. Beware of the evil minimum monthly repayment!

Until the Nineties, credit-card firms would insist that you repaid a minimum of a tenth (10%) of your balance each month. However, over the years, minimum monthly repayments have been cut back to 5%, 3%, 2½% and now, 2%. Lower minimum monthly repayments mean that your debt takes far longer to repay and the lender earns far more interest.

As I explained in The Day That Credit Cards Turned Nasty, a balance of £2,000 on a card charging 19.6% APR (equal to 1.5% per month) with minimum monthly repayments of 2% (minimum £5) would take 42 years and 4 months to repay! So, if you pay the minimum 2% or whatever on your cards, expect to take the rest of your life to repay your balances!

Alternatively, set up a Direct Debit or standing order for a level monthly payment – one that doesn't reduce over time. For example, 5% of £2,000 is £100; repaying this debt at a flat £100 a month would kill it in two years exactly. In other words, it gives you back over forty years of your life!

4. Pay by Direct Debit

If you always pay off your bill in full, set up a variable Direct Debit to collect the entire balance shown on your previous statement at the same time each month. This will prevent you from forgetting a payment, for example, when you're on holiday, and avoid interest and penalty charges.

On the other hand, if you frequently use your card to borrow money and carry over a balance from month to month, set up a Direct Debit for at least the minimum monthly repayment. However, you should view this as the bare minimum and, therefore, you should make additional payments whenever you can afford to. Otherwise, a relatively modest debt could last a lifetime!

5. Check how long your interest-free period is

All but a few cards offer interest-free spending for a certain period. For example, with 31 days between statements and 28 days to pay your bill, you could enjoy up to 59 days' interest-free credit. I call this 'transaction timing', and I make sure that I pay for large purchases just after my most recent statement date, in order to take maximum advantage of the interest-free period.

Many cards have a standard interest-free period as high as 59 days, but online bank Egg only gives its cardholders a 45-day interest-free period. However, it provides online statements, so cardholders don't have to wait for their bill to arrive a week later through the post.

If you only use your card for spending, and would like to enjoy an interest-free period of up to a year, get a '0% on purchases' credit card (see tip 1 above).

Check out our deck of 0% cards in the Fool's Credit Card centre.

6. Be paid to spend with cashback

Strange but true: you can be paid to spend on your credit card. With cashback, you earn an annual rebate of, typically, 1% of your spending. Normally, this is sent to you by cheque (or credited directly to your account) on each anniversary of your account opening date.

Cashback cards are only suitable for full payers, as the rebate that you earn would be worth less than even one month's interest. I've just opened a Best Buy cashback card: the Morgan Stanley Platinum MasterCard. Until 1 October, it pays 2% on the first £2,000 of spending and then 1% on subsequent spending. From October, these rates halve to 1% and ½% respectively. You can apply for this card, and the Amex Blue card, another Best Buy cashback card, via the Fool.

7. Nasty fines for minor slip-ups!

Be prepared to be hit with a hefty fine if you don't follow the terms and conditions of your account to the letter. If you don't pay on time, miss a payment, bounce a Direct Debit, or overshoot your credit limit, expect to pay a penalty of, typically, £25.

These punitive charges far exceed the cost of administering these problems, largely because they are computer-generated. In fact, they provide a healthy income stream for card firms, who make hundreds of millions of pounds each year. So, stick to the rules, pay your bills on time and remember that it's a credit limit, not a target!

8. Rip-off payment protection insurance (PPI)

In A Colossal Credit-Card Con!, I explained why credit card repayment protection (CCRP) is a massive swindle. Credit-card firms are collecting premiums of at least a billion pounds a year from this optional life, accident, sickness and unemployment cover. On the other hand, they are paying out perhaps a tenth (10%) of this sum to claimants. In other words, CCRP has a profit margin that approaches 90%. Even legendary highwayman Dick Turpin would be proud of this robbery!

What's more, if you pay off your balance in full every month, you still pay premiums for this cover, because the premium is based on your statement balance. For full payers in particular, this insurance is a hideous waste of money!

9. Don't withdraw cash on your card!

If you shop around, you can find several credit cards that offer low APRs on purchases. For example, Capital One's No-Hassle Platinum MasterCard has a standard interest rate of 6.9% APR on purchases. However, if you withdraw cash on your credit card, expect to pay a much higher rate of interest. Most card companies charge APRs in excess of 20% on cash withdrawals from hole-in-the-wall machines and over-the-counter withdrawals. For instance, the above low-cost card charges a whopping 20.5% APR on cash withdrawals from the date of the withdrawal until every last penny is paid off!

Furthermore, the fun doesn't stop with sky-high rates on cash withdrawals. Cash withdrawals also come with fees attached, with a typical fee being 2% of the withdrawal, with a minimum of £2. So, if you use your credit card to make lots of small withdrawals, expect to get stung by these charges. The simple message is: don't withdraw cash on your credit card - stick to your debit card, instead!

10. Know your card companies

There are more than a thousand differently branded credit cards in issue in the UK. However, most are issued by six big card companies: Co-operative Bank, HBOS, HSBC, Lloyds TSB, MBNA and Royal Bank of Scotland.

If you apply for credit to the same company too many times (for example, if you're a 0% 'rate tart'!), it may become suspicious and start turning you down. Hence, it pays to know your card brands: this article lists the most popular cards and their issuers. By spreading your applications between different companies, and spacing out the hits to your credit reference file, you can keep on getting 0% deals and the like almost indefinitely. I've had at least twenty 0% credit cards to date!

I hope that this article has helped you to become a better card sharp!

More: Take a look at the great deals in our Credit Card centre.

Cliff owns shares in HBOS.