Before you apply for or use a 0% credit card, watch out for these five sly tricks!
As regular readers know, I'm a great fan of 0% credit cards.
During the Nineties, bad spending habits caused me to build up massive debts: by early 1998, I owed about £40,000 across thirteen or so credit cards. Nowadays, it makes me shudder when I recall these bad old days!
Anyway, juggling my debt burden kept me very busy and, what's more, I became expert at shuffling my debt around to minimise my interest bill. When one card company offered me a promotional low-rate deal, I would take full advantage by transferring other more expensive debts to it. However, being a "rate tart" became much fun on Christmas Day, 2000, when online bank Egg stole a march on its competitors by launching the UK's first '0% on balance transfers' card.
I was one of the early applicants for an Egg Card, which still gives me a 0% deal each year! Of course, Egg's rivals jumped on the 0% bandwagon, so there are now scores of different 0% deals around. However, the banks got wise to rate tarts and responded by introducing various measures to make back the money they lose from subsidising these 0% deals (about a billion pounds a year). Here are five to watch out for!
1. Balance-transfer fees
Last December, I predicted that more and more card issuers would introduce fees on balance transfers (BTs) during 2005. Sure enough, big players including Alliance & Leicester, Halifax/Bank of Scotland, Tesco Personal Finance and Virgin Money have brought in BT fees. The latest issuer to go down this route is Marbles, which introduced a BT fee last Thursday.
Most BT fees fall into the 2%, minimum £5, maximum £50 range. Of course, on a £10,000 transfer, a £50 fee amounts to a relatively minor ½% charge. However, a £2,000 transfer would cost £40, which is a steeper price to pay. As most of the longest 0% offers come with BT fees attached, my view is only pay a BT for a market-beating deal, or if you're transferring very large balances, where the fee isn't such a big deal. In addition, watch out for those oh-so-convenient credit-card cheques, as many now come with hefty fees attached. Only sign on the dotted line if your cheques charge low or no fees!
2. Payment protection insurance (PPI)
As I explained in A Colossal Credit-Card Con!, this cover is a huge con. Card firms are collecting premiums of a billion pounds a year from this optional life, accident, sickness and unemployment cover. However, they pay out no more than a tenth (10%) of this pot to claimants. In other words, these policies have profit margins approaching 90%. They are nothing short of high-street robbery!
Not content with enjoying huge margins and underwriting profits, many card users have been sneakily pushing up the cost of this cover. For example, on 1 September, Lombard Direct upped its premium rate from 74p to 79p, and Mint jacked up its rate from 77p to 79p. Most card users - especially full payers and 0% rate tarts - need PPI like they need a hole in the head. Give it a miss!
3. Spending on a balance-transfer card
The crucial lesson is to know your 0% card, because there are three types:
- 0% on balance transfers - good for BTs only, so don't ever spend on these cards!
- 0% on purchases - good for spending only, so don't do BTs onto these cards!
- 0% on both BTs and purchases - good for both, but go easy on the spending!
If you're careless and start spending on a BT-only card, expect to pay an interest rate of anything up to 25% a year on your retail transactions. Even paying off your spending in full won't help, because your monthly repayments usually go towards paying off your 0% debt first, so you're caught in the high-interest trap!
4. Fines for late payment
When I get a new 0% credit card, I always set up a Direct Debit to pay the minimum monthly repayment. Past experience has taught me that card issuers like nothing more than to hit you with a whopping fine for paying late, which can be anything up to £35 per offence. What's more, if you miss a repayment on a 0% card, some firms will withdraw your 0% deal and start charging you interest at standard sky-high rates. So, make sure that you stick to being a good payer and, in particular, don't miss a repayment while you're on holiday!
5. Watch out when your 0% deal ends!
Make certain that you pay off or transfer your 0% debt before your introductory period comes to an end. If you don't, you'll start paying interest at standard rates, which spoils the fun of the game. Note when your 0% deal expires and write reminders everywhere: in your diary, calendar, on the fridge, on your to-do list and so on. Forget this critical date at your peril, and make darn sure that you apply for another 0% card in good time to conduct the next 0% BT - four to six weeks should be enough time for the next 0% leap!
Learn the rules of the 0% game in From 30% To 0% In Sixty Seconds!
More: Check out the delightful deck of 0% cards in our Credit Card centre!
Cliff owns shares in HBOS, the parent company of the Halifax and Bank of Scotland.
