Thank to the credit crunch, borrowing is getting more expensive. So, be sure to steer clear of these swindles.
Thank to the credit crunch, borrowing is getting more expensive. So, be sure to steer clear of these swindles.
It’s been a tough year. Not only is credit harder to obtain, but with interest rates creeping up across the board, many of us are being forced to tighten our belts.
This is in spite of the Bank of England cutting its base rate three times since December, taking it from 5.75% to 5%. Indeed, over the past year, mortgages, credit cards, personal loans and overdrafts have all become more expensive.
So, the price of being in debt is going up, but our problem doesn’t end there. That’s because the interest rates we pay tell only half the story. Other charges, fees and sneaky tricks also work to push up the cost of credit. So, whatever you do, watch out for these costly credit cons:
1. Negative payment hierarchies
Let’s say that you have the following transactions on a credit card:
• A balance transfer of £2,000, charged at 0% APR for twelve months; and
• Retail spending of £500, charged at 16.9% APR until further notice.
Now, let’s say that you make a monthly repayment of £200 to this card. Guess which debt this goes towards paying off first? That’s right: the cheaper 0% balance. In other words, until you’ve repaid your entire balance in full, you will be charged interest on this £500 of retail spending.
This sneaky trick, known as a ‘negative payment hierarchy’, is used by 99% of credit cards. One honourable exception is Nationwide BS, whose cards assign repayments to your most expensive debt first. So, never use a 0% balance transfer card to go shopping, unless you’re absolutely certain that you won’t be charged interest on this retail spending.
2. Paying monthly insurance premiums
Insurance companies would prefer you to pay your yearly premium for, say, car insurance or home insurance as a single, upfront sum. This is because one-off payments are cheaper and easier to process than monthly premiums. Nevertheless, some generous insurers allow you to spread the cost of your cover over twelve months without charging interest.
On the other hand, some crafty insurers make a pretty penny by charging sky-high interest rates for the ‘convenience’ of paying in instalments. Typically, these firms charge interest at between 16% and 30% APR on monthly premiums. Hence, you’re far better off grabbing a year’s interest-free credit by paying your premium using a ‘0% on new purchases’ credit card.
3. Payment protection insurance (PPI)
In my view, no coverage of financial swindles would be complete without some mention of the dreaded payment protection insurance. In theory, PPI pays out monthly benefits following accident, sickness or unemployment. In practice, PPI policies are complicated, riddled with loopholes and get-out clauses, frequently mis-sold, and astonishingly overpriced.
For the record, adding PPI to a loan, credit card or overdraft can increase the size of your debt by up to a third (33%). Thus, over the life of a debt, premiums for payment protection insurance can add thousands of pounds to its overall cost. So, never buy this cover from a lender. Instead, track down a Best Buy policy from the likes of award-winning Fool Partner British Insurance.
4. Store cards
Way back in the early Nineties, when I worked on the ‘Dark side’ of financial-services, I wrote a review of store cards entitled “The Devil’s Debt”. I’ve used this phrase many times since, and also describe store cards as ‘the crack cocaine of credit’. This is because store cards are easy to come by, but, thanks to their astronomical interest rates, they can do a lot of damage to your financial life!
Following an investigation by the Competition Commission, new regulations governing store cards were introduced on 1 May 2007. Alas, as I warned in Britain's Worst Store Cards, these rules have failed to clean up this market. Today, a typical store card charges an interest rate of 24.3% APR, compared with 16.5% APR for a mid-table credit card. In other words, store cards charge around 50% more interest than credit cards, which is half as much again. So, if you owe money on a store card, then move your debt to a 0% balance-transfer credit card today.
5. Withdrawing cash on a credit card
As I warned in Cash And Credit Cards Don't Mix, you should always use your debit card -- and not your credit card -- to withdraw cash from cash machines or over the counter. This is because all but a few debit-card withdrawals come free of charge. On the other hand, credit cards charge withdrawal fees and eye-popping rates of interest on cash withdrawals.
Indeed, it’s not unusual for cash withdrawals on credit cards to attract an interest rate of between 20% and 35% APR. On top of this, there’s a cash-withdrawal fee of around 3% (minimum £3). So, taking out a tenner on your credit card could cost you almost half as much again in interest and charges. Oops.
In summary, if you don’t want to be taken for a ride by lenders, then always look beyond the headlines. Otherwise, you may fall foul of a whole host of high charges hidden in the small print!
More: Find great rates on credit cards and mortgages | Avoid This Credit-Card Con | More Pain For Egg Customers
