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FOOL'S EYE VIEW
You could call 2004 "Plastic Year", because our spending on credit and debit cards (at £273 billion) exceeded cash spending (of £272 billion) for the first time ever. In other words, we Brits are abandoning cash in favour of swiping our plastic and punching in PINs! Our love of credit cards is almost universal: by the end of 2004, over 30½ million adults had at least one credit card, so almost two-thirds of us use them. In total, there are seventy million in circulation. Although the credit card enjoys almost universal usage, it can be a double-edged sword. Used wisely, it provides valuable financial and other benefits; used badly, it becomes a WMD - Weapon of Money Destruction! So, without further ado, here are the goodies to grab and tricks to dodge when choosing a new credit card or using your existing plastic! 1. Don't rely on credit to keep up with the Joneses Last year, we spent £123 billion on our credit cards in 1.9 billion transactions, which works out at about sixty transactions per second. However, always remember that standard interest rates on credit cards are very high, which make them an extremely expensive way to borrow. Rather than spending tomorrow's money today, learn to budget - and remember, it's a credit limit, not a target! 2. Don't let your balance linger Our total credit-card debt has been growing at about 15% a year for the last twelve years. About three-quarters (75%) of this debt is interest-bearing and, at an average annual interest rate of 16%, it's costing us about £560 million a month in interest. If you want to avoid paying interest on your card balances, read tip four! You'll find help and advice in our Get Out of Debt centre! 3. Be a full payer The best way to handle your credit card is pay off every monthly bill in full. That way, you avoid paying any interest and enjoy between 45 and 59 days' interest-free credit. Use 'transaction timing' to make maximum use of this period: for example, I often defer major purchases until my statement date, in order to benefit from the full 59 days' grace. 4. Discover the joy of 0% cards On Christmas Day 2000, online bank Egg gave British borrowers a wonderful gift. It launched the first 0% on balance transfers card, which allowed cardholders to transfer existing debts to an Egg Card and avoid paying interest for six months. Naturally, many lenders followed suit, so there are now scores of 0% cards to choose from. Some offer 0% on purchases only, some only on balance transfers, and the best offer 0% on both. This article explains how to use these beauties and what to watch for. Then again, if you can't be bothered to surf between 0% deals, try a low-rate lifetime balance transfer. Check out our deck of cool 0% credit cards! 5. Pay attention to interest rates APRs (annual percentage rates) on credit cards vary enormously. For example, standard rates for purchases can be as low as 7% APR and as high as 30% APR. Even if you never borrow on your card, it's worth taking APRs into account, as you never know when you might slip up and incur interest. Also, don't be fooled by monthly rates; for example, 1.5% a month might not sound high, but it compounds up to a whopping 19.6% APR. Ouch! 6. Don't pay minimum monthly repayments (MMRs) The road to debt hell is paved with minimum monthly repayments! The lower your minimum monthly repayment, the longer your debt will take to pay off. For example, paying MMRs of 2% on a debt of £2,000 at 19.6% APR will take over 42 years to clear this debt. What's more, you'll pay a whopping £5,466 in interest along the way! So, don't pay MMRs; instead, pay as much as you can afford, say £100 a month fixed. Otherwise, you'll be burdened with a lifelong debt! 7. Get paid to spend with cashback cards If you're a full payer, you can make money from credit cards. Simply use a cashback credit card to pay for all your purchases. Each year, you'll receive a cheque or credit for the cashback that you've earned over the previous twelve months. For example, my cashback card pays me up to £2 for every £100 of spending - in the last four months alone, I've earned almost £60 just by paying with plastic! Also, don't forget that you can use loyalty cards (such as the Boots Advantage, Nectar and Tesco Clubcard) to earn extra rewards on purchases. View our Best Buy cashback credit cards! 8. Store cards are the Devil's debt As store cards do so much harm, I've taken to calling them "the crack cocaine of credit"! The Competition Commission believes that this market is unfair and anti-competitive, which means that cardholders are paying far higher interest rates than they should. If you do have a store card, always pay off your bills in full and don't buy any overpriced insurance and other add-ons! Swap your store card for a cracking 0% credit card today! 9. Pay by credit card for free legal protection Thanks to Section 75 of the Consumer Credit Act, you have extra protection if you pay by credit card. If you buy goods costing between £100 and £30,000 on a credit card (but not a debit card), you can claim against the card issuer if something goes wrong. Even if you've paid only a deposit on your credit card, you can claim a refund of the entire cost of the goods. So, if goods fail to arrive, are damaged or defective, your card issuer "wears the supplier's shoes" and must reimburse your loss. Be sure to use this valuable safety net when making major purchases! Also, if your card issuer provides free price protection, purchase protection, travel accident insurance or an online fraud guarantee and Internet delivery protection, it's worth making use of these benefits. However, I don't believe that it's worth paying extra for them, so tread carefully. You can learn more about these bells and whistles here. 10. Watch out for fines and annual fees The Office of Fair Trading is unhappy with the extortionate penalties levied on cardholders. For example, if you pay late or exceed your credit limit, you face fines of up to £35 per slip-up. My advice is to pay at least part (or all) of your bill by Direct Debit, so you never fall foul of these punishments. Also, some card firms may reintroduce annual fees, which had almost become extinct. 99% of cards don't charge annual fees, so vote with your feet if your issuer tries this old trick on you! 11. Don't withdraw cash on credit cards If you withdraw cash on your credit card, expect to pay sky-high interest rates until your bill (including accrued interest) is finally settled. Also, you'll pay cash withdrawal charges of around 2% (minimum £2 to £5) per withdrawal, so withdrawing £20 could cost you up to a fiver on top! Here's the golden rule: credit cards are for purchases; debit cards are for cash! 12. Avoid rip-off insurance and other expensive add-ons Payment protection insurance (PPI, which covers your monthly repayments if you can't work due to an accident, sickness or unemployment) is perhaps the UK's biggest rip-off. Having working in this industry for eleven years, I know it's a right royal rip-off, so I don't buy PPI - and nor should you! Likewise, I don't buy the card protection plans offered by Card Protection Plan (CPP) or Sentinel, which cost about £15 a year and provide support and fraud protection when your cards are lost or stolen. I know that, in most cases, card issuers do not bill honest cardholders for fraudulent transactions, and I'm also aware that my fraud liability is limited to £50 by law. Also, a friend worked for one of these firms, and he warned me about their breath-taking profit margins. Hence, I give this cover the thumbs-down, too! 13. Be careful when spending overseas Take the wrong card abroad and it may end up costing you a small fortune! That's because many card issuers charge sneaky "currency conversion charges" (usually 2.75%), plus fees for using foreign cash machines. To avoid these extra charges (which can add up to 7% to your spending costs!), use a credit card from Nationwide BS, which is the only issuer not to charge foreign usage loading fees! 14. Affinity and charity cards Many people use these cards to spend because they provide financial support to a good cause, charity or sports team. For example, as a West Ham United fan, I could get a Hammers credit card from MBNA, which issues dozens of branded cards on behalf of sports teams. However, few, if any, of these affinity cards would win any Best Buy awards, because they're largely just run-of-the-mill cards. Indeed, you would raise far more money for your club or charity by using a Best Buy cashback card and donating your annual reward (plus Gift Aid on top) to your favourite cause! 15. Earn high rates of interest using 0% deals I'm one of a band of credit-card players who have discovered that it's possible to make serious money from cards. I'm a 'super tart' or 'stoozer'; I borrow money from 0% credit cards and deposit it into a high-interest no-notice savings account. For example, at one point I owed almost £60,000 on 0% cards, on which I was earning savings interest of about £275 a month before tax. However, this technique requires a lot of discipline and financial savvy (especially when used with offset mortgages), so don't try it unless you fully understand the pitfalls! 16. Some final comments Phew, that's it from me. I hope this article helps you to become a better card player! More: Find your perfect plastic in our Credit Card centre! | Prefer loans to cards? Check out these Best Buys!