If you're wondering why I write about credit cards over and over again, it's simply because they are one of the most widely held and used financial products in the UK.
Indeed, almost two-thirds of British adults have one or more credit cards, and two-thirds of the credit cards in the EU are issued in the UK. Hence, because we Brits are suffering from "credit-card compulsion", you can understand my obsession with plastic!
If you're a smart card player, you can enjoy cashback as you spend, lengthy interest-free periods, handy legal protection and other valuable benefits. However, if you lose control of your deck, you can end up on the road to financial misery. With this in mind, here are ten tricks and traps to avoid:
1. Sky-high standard interest rates
If you pay off your monthly bill in full every time, your credit card won't turn into a WMD: Weapon of Money Destruction! However, if you only make part-payments, you'll be charged interest, often at extortionate rates. Although the Bank of England's base rate is a mere 4½% a year, most credit cards charges three to six times this amount.
For example, earlier this year, I analysed the standard interest rates charged on purchases by reviewing 319 credit cards in the Moneyfacts database. I found that the average annual interest rate was just over 15½%, with 197 cards charging more than this rate. Since then, rates have been rising, making cards even more expensive. Annual interest rates of 15½% APR will more than double your debt every five years, so this is a terribly expensive way to borrow!
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2. Minimum monthly repayments (MMRs)
As I warned in The Day That Credit Cards Turned Nasty, over the last decade, banks have progressively cut minimum monthly repayments on credit cards from 10% down to as little as 2%. The upshot of this is that those cardholders who can only afford to pay their MMRs are signing up to a lifetime debt.
For instance, a debt of £2,000 at an interest rate of 19.6% APR will take 42 years and four months to clear using an MMR of 2% (minimum £5). Even worse, this debt will cost a total of £7,466, thanks to £5,466 of accrued interest. Aaargh! So, don't pay MMRs; instead, set up a Direct Debit or standing order for, say, a flat 4% of your present balance. If you don't spend any more on your card, this regular monthly repayment will dynamite your debt in less than three years. Job done!
3. Crippling cash-withdrawal charges
DON'T withdraw cash on a credit card -- always use your debit card instead. If you use a credit card to withdraw cash, you'll pay even higher interest rates than you would on purchases, say, 10% a year more, or up to 30% a year.
In addition, you'll pay a cash-withdrawal fee of, say, 2% of the amount withdrawn, with a minimum charge of £2.50. Finally, cash withdrawals don't enjoy the usual interest-free period of between 45 and 59 days, so you pay extortionate interest rates from the withdrawal date onwards. Remember: only clowns withdraw cash on credit cards!
4. Cruel credit-card cheques
I've told every credit-card company of which I'm a customer that I don't wish to receive credit-card cheques. Although I've used these in the past to take advantage of special low-rate offers, these days, I only ever seem to get expensive-to-use cheques.
Indeed, I cancelled one card yesterday when I received a book of TEN credit-card cheques, all of which would be treated as cash withdrawals. In other words, writing one of these cheques would cost me 21.94% APR, plus a handling fee of 2.5%, minimum £2.50. The blurb that came with these cheques suggested that I use them to pay for home improvements; give gifts; pay bills, tradesman, taxes or school fees; or to "give myself access to some extra cash". Not at almost 22% a year, thanks very much!
5. Ludicrous late-payment penalties
If you slip up by paying your credit-card bill late, exceeding your credit limit, or bouncing a payment to your card, expect to pay a hefty fine. In these circumstances, most cards charge a penalty of £20 or £25, even to first-time sinners, as well as repeat offenders.
However, the Office of Fair Trading is alarmed at these penalties, because the work involved in dealing with these slip-ups is negligible, thanks to automated and computerised processes. Hence, it has warned eight leading card issuers to review the level of their fines, or face a formal investigation. In the meantime, I'd recommend setting up a Direct Debit or standing order, so that you don't fall foul of these fines.
6. Pricey payment protection insurance (PPI)
For more than three years, I've been waging a war on payment protection insurance because, having worked in this industry for over a decade, I know PPI to be one of the biggest financial rip-offs around. PPI for credit cards covers your monthly repayments if you are unable to work due to accident, sickness or unemployment. In theory, it should provide valuable peace of mind, but these policies are undermined by widespread over-charging.
As I explained in Millions Conned By Card Cover, PPI for credit cards can cost between 7% and 28% of the benefit which you receive when you make a claim. In other words, with the most expensive policies, you'd need to be off work for four months of every year to make paying for this protection worthwhile! By my reckoning, about a fifth of the UK's 75 million credit cards are covered by PPI, so around six million people are being royally ripped off by this cover.
From my inside knowledge of this industry, I know that premiums for all but the cheapest policies could be halved overnight and yet these policies would still turn a profit. Alas, with lenders and insurers sharing commissions of up a billion pounds a year from card PPI alone, they have no interest in charging a fair price for this protection!
7. Extra fees when overseas
Warning: take the wrong plastic abroad and it could spoil your holiday! That's because all but one card issuer charges hidden "currency conversion charges" when you pay in a currency other than sterling (which includes overseas websites). Typically, card firms give you unattractive exchange rates and then slap an extra fee of 2.75% on top, known as a "foreign currency loading" fee.
Furthermore, if you use a foreign cash machine, you'll pay further charges, often more than you'd pay for withdrawing cash in the UK. To avoid these charges (which can add £7 to every £100 which you spend), use a Nationwide BS credit card, as it doesn't levy currency loading fees.
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. In addition, its cash-withdrawal fee is lower at just 1.5%, minimum £1.50.
8. Slippery statement and payment dates
In February, I warned Barclaycard customers that the firm was cutting interest-free periods for customers who usually pay their monthly bills in full. Indeed, some cardholders who failed to notice the brief statement message warning them of this change were hit with late-payment fines.
Years ago, I noticed that card companies were subtly manipulating statement and payment dates to their advantage. For example, if my statement date were to fall on a weekend, my card issuer would always bring forward my statement date to the Friday, rather than pushing it back to the Monday, in order to improve its cash flow.
Furthermore, one Fool reader warned us this week that MBNA has got into the habit of allowing his statement date (and, therefore, his payment date) to wander, moving between the first and fourth of each month. Hence, some of his spending was being captured before his statement date and, therefore, he was forced to pay for these transactions a month earlier than he'd expected.
What's more, he was stung with a £25 fine because his payment date moved forward four days. Sneaky, eh? Here's his solution to this problem: "Check the Fool Card centre and move to a better one!"
9. Annoying annual fees
Earlier this year, when analysing the credit-card market, I discovered that only fifteen (fewer than one in twenty, or 5%) charged annual fees. These fees ranged from the £10 charged by six cards issued by Lloyds TSB to the £275 charged by the super-premium Morgan Stanley i24 card. However, annual fees are making a comeback, so keep your eyes peeled for statement messages warning you of the introduction of annual fees, and be prepared to ditch and switch when the need arises!
10. Bothersome balance-transfer fees
As I warned in Conquering The Card Tarts, close to half of all 0% balance-transfer cards now charge a handling fee, typically 2% of the value of each transfer. Indeed, if you want a 0% balance-transfer deal lasting more than six months, you're now forced to pay a fee for the privilege of enjoying an extended 0% contract.
Be warned: although most card firms cap their transfer fees at a maximum of, say, £50, do watch out for uncapped transfer fees, especially if you're transferring larger balances. For example, a single transfer of £10,000 might cost you £50 with a capped fee, but a whopping £200 with an uncapped fee, so keep your eyes peeled!
Finally, I heard disturbing news from another Fool reader who arranged a reduced-rate 3.9% balance transfer to her Egg card. She discovered that Egg treated her transfer fee as a retail purchase, which means that she's paying interest on this £50 at Egg's standard rate for purchases of 15.9% APR. This ruse is new to me -- yet another crafty swindle to watch out for!
I hope that this article helps you to become a more confident card player!
More: Choose your perfect plastic in our Credit Card centre | Get help and advice on Getting Out of Debt!
Disclosure: Cliff owns shares in Lloyds TSB.
