FOOL'S EYE VIEW
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If you're looking for a simple way to make seriously large returns without breaking the law, may I suggest that you launch your own credit card? Joking aside, as far as credit cards are concerned, having a Consumer Credit Licence is as good as having a licence to print money. Indeed, with around 75 million credit cards issued in the UK, pushing plastic makes for fantastic profits. Here's the A-Z of why you need to handle your cards with care: A IS FOR: Annual fees Only fifteen of the 319 cards listed in the Moneyfacts database charge annual fees, or fewer than one in twenty. So, if you pay an annual fee for using your credit card, then you're very much in the minority. Annual fees range from the £10 charged by six cards issued by Lloyds TSB, right up to £120 for the Co-operative Bank Gold Base Rate and British Airways American Express Premium Plus cards, and a whopping £275 for the super-premium i24 card from Morgan Stanley. However, some card issuers (notably MBNA) have sneakily introduced annual fees for existing cardholders, typically £25, so do check the small print on your statements for bad news of this kind! C IS FOR: Card protection plans and other insurance These insurance policies protect cardholders whose cards are lost or stolen. By calling Card Protection Plan or Sentinel (the two leading providers), all of your registered cards are cancelled and re-ordered, plus you won't be liable for any fraudulent spending on your cards. The annual cost of this protection is around £15, and these companies push their policies by playing on our fears of fraud. However, the law states that you are only liable for the first £50 of fraudulent spending made prior to notifying your card issuer and, in any event, card issuers usually waive this £50. An ex-marketing manager at one of these firms once told me that these plans are among the most profitable financial products ever designed, which explains why I've never bought one! Cash-withdrawal fees If you want to withdraw cash from a hole-in-the-wall machine, always reach for your debit card. Withdrawing cash on a credit card is incredibly expensive, so it should be done only in emergencies, if at all. Not only will you have to pay a withdrawal fee of, typically, 2.5% of the amount withdrawn (minimum £2.50), you'll also pay sky-high rates of interest, since the interest rates on cash withdrawals are much higher than ordinary purchase rates. So, avoid withdrawing cash on your credit card at all costs! Credit-card cheques I got fed up with credit-card firms sending me unsolicited credit-card cheques, which I then had to shred. Indeed, they only halted when I threatened to close my accounts if I received another sheet of cheques. The reason why I would never write one of these cheques is that they are normally treated as cash withdrawals, which means interest rates of, say, 20%+ APR, plus handling fees. Avoid these letter bombs like the proverbial plague! Currency-conversion fees Take the wrong credit card abroad and your holiday could be ruined, thanks to sneaky "foreign currency loading" and cash-withdrawal fees. Getting it wrong could mean being hit by charges of up to £6 for every £100 that you spend. Card sharps and frequent travellers should take a Nationwide BS credit card abroad, as they don't charge the usual 2.75% currency-conversion fee (although they do charge a fee for cash withdrawals). Cutbacks to cashback and rewards Wherever possible, I buy everything (even the smallest purchases) using my Best Buy cashback card. By doing this, I'm being paid to spend; in fact, I've earned cashback of £70 in the past eight months alone. However, cashback deals are constantly being cut back or withdrawn, so yesterday's star can become tomorrow's dog. Hence, it pays to keep a close eye on your cashback and switch to a better deal if yours turns sour. According to Moneyfacts, at £40 for year one, Morgan Stanley cards pay the highest cashback for a monthly spend of £250. H IS FOR: High interest rates and margins Ignoring the fifteen cards in the Moneyfacts database which charge annual fees leaves us with 304 cards to explore. The standard interest rates on these cards vary from 0.48% a month (5.9% APR) to 2.21% a month (30% APR), so the highest interest rate is five times the lowest. Ouch! What's more, the majority of these cards charge interest at several times the Bank of England's base rate, which is currently 4.5% a year. In fact, almost three-quarters charge an APR which is at least ten percentage points above the base rate (224 of the 304 cards, or 74%, charge at least 14.5% APR). Overall, the average standard interest rate comes to 15.5%, so a typical credit card has an interest margin of eleven percentage points above the base rate. Nice! Don't pay interest on your debts when you can breathe easy with a 0% credit card! L IS FOR: Late-payment penalties Just as the England football team have struggled with penalties in the past, so UK cardholders suffer thanks to credit-card penalties! If you don't pay your monthly bill on time, miss or bounce a payment, or exceed your credit limit, expect to pay a fine of £20 to £25. These penalties are pretty severe, because the punishment hardly fits the crime. Indeed, the Office of Fair Trading has warned eight leading card issuers that it views these penalties as unfair, and may take action against these firms. In the meantime, stay out of trouble by paying your entire balance by Direct Debit (or, at the very least, your minimum monthly repayment). Low credit limits In the fight against "rate tarts" (who surf their debts from one 0% card to another, permanently avoiding interest), lenders have hit back by giving lower credit limits to tarty applicants. If you have a debt of, say, £5,000 that you want to switch to a 0% card, it's not much help when your new card issuer welcomes you with a measly credit limit of, say, £500! However, some issuers do offer to match the highest credit limit among your existing deck of cards, so this is one way around the problem. Alternatively, if you earn more than, say, £20,000 a year, try applying for a Gold or Platinum card, as they usually guarantee higher minimum credit limits. M IS FOR: Minimum monthly repayments (MMRs) As I warned in The Day That Credit Cards Turned Nasty, minimum monthly repayments are utterly evil, because they create lifelong debts for unwary or unsophisticated borrowers. A modest debt of, say, £2,000, charged at 19.6% APR can take over forty-two years to repay and cost a total of £7,466, thanks to an MMR of 2% (minimum £5). So, never, ever pay only the MMR; instead, demolish your debt faster by paying a set monthly amount, say, £100 by standing order or Direct Debit. Again, 0% credit cards help to speed up the process, because every penny of your payment goes towards repaying your debt, not interest! N IS FOR: Negative payment hierarchies Another word of warning: never spend on a 0% balance-transfer card unless it also offers 0% on purchases (which these cool cards do). Thanks to what's known as a negative payment hierarchy, your monthly repayments will be used to reduce your 0% balance, leaving you paying interest rates of up to 30% APR on your purchases. P IS FOR: Payment protection insurance (PPI) And so we come to PPI, which is perhaps the most overpriced product in the entire history of insurance. As I explained in Millions Conned By Card Cover, card issuers are pocketing a billion pounds a year from cardholders who don't realise how outrageously overpriced this life, accident, sickness and unemployment protection really is. Indeed, with profit margins regularly topping 80%-90%, it's a major money-spinner for card issuers. If you need some peace of mind, cancel your PPI policies and buy income protection (long-term sickness cover) instead. S IS FOR: Shorter interest-free periods As I warned last week, Barclaycard has decided to cut its standard interest-free period for cardholders who repeatedly pay off their monthly bills in full. Alas, this is just the latest move in the ongoing drive to cut standard interest-free periods. It used to be the case that almost all credit cards offered a 59-day interest-free period, issuing statements in a 31-day cycle, with 28 days to repay. However, Egg cards only offer 45 days, and Co-operative Bank cards offer just 46 days, giving cardholders as little as fifteen days to pay up. Store cards: the Devil's debt! Compared to store cards, even the most expensive credit cards look pretty tame! According to Moneyfacts, the only store cards to charge a standard interest rate of less than 18.9% APR are IKEA Home (12.9% APR) and John Lewis (15.5% typical APR). All other store cards charge interest rates of up to 30.9% APR, which practically puts them on a par with loan sharks! Feel free to use your store cards to claim discounts, loyalty points and cardholder offers, but never borrow on them -- always repay your bill in full every time. T IS FOR: Tarnished Gold and Platinum cards It used to be the case that a Gold card was regarded as a success symbol, marking you out as one of the financial elite. In time, minimum income limits fell, allowing more and more of us to become Gold cardholders. In time, the Gold brand became devalued, so financial firms responded by introducing supposedly superior Platinum cards, and even ultra-exclusive Black cards. These days, I take these brands with a pinch of salt; my advice is to study the features and benefits on offer, rather than seeking out a flashy piece of plastic! Z IS FOR: Zero% tricks Last month, I warned that card issuers are coming up with more and more ways to discourage the card tarts. Perhaps the best way to make card tarts pay their way is to introduce handling fees for balance transfers. No card issuer charged 0% balance-transfer fees until August 2004, when market leader Barclaycard introduced a 2% fee, capped at £35. Once the mould was broken, other card issuers rushed to follow suit and, by December 2005, 41 of 91 0% cards (45%, or close to half) charged transfer fees. What's more, some charge uncapped fees, so a transfer of £5,000 with an uncapped fee of 2% would cost £100. Ouch! You'll find fee-free balance transfers in our Credit Card centre! Finally, I'm going to do something today which I don't do very often: defend the card issuers and their charges, because the story isn't over quite yet. Banks have to contend with bad debts, card and insurance fraud, interchange fees to use the Visa and MasterCard networks, and so on and so forth, all of which cut into their profit margins. Then again, the UK's five biggest banks should have made pre-tax profits of around £35 billion in 2005, so I shouldn't feel too sorry for them! More: Find your perfect plastic in our Credit Card centre! Need a loan? Check out our Best Buys. Cliff owns shares in two major card issuers: HBOS and Lloyds TSB.
