Ten Credit Card Pitfalls

by Harvey Jones on 21 January 2009  |  24 comments
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Don't fall for these ten dirty credit card tricks!

There are plenty of reasons to really, really dislike banks right now, and I'm just about to supply you with another 10.

Only 10, I hear you ask?

That's right, just 10 today, because I'm only writing about one small part of their operations: credit cards.

Banks and lenders are a slippery bunch, but they really excel themselves when it comes to the small print on your plastic.

Here are 10 of their favorite tricks, and how to avoid them. You may already be familiar with many of them, but can you guess them all?

1. Raising APRs.

What's the APR on your credit card? If you're anything like me, you won't have checked since you took it out. Card issuers pay much closer attention, and boost their bottom line by sneaking their APR upwards, even if base rates are hurtling down in the opposite direction. The average APR crept up from 16.8% to 17.7% in the last 12 months, Defaqto tell me. That's almost 12 times base rate - until recently it was four or five times. Check what your cards are charging, and be prepared to switch.

2. Minimum repayments.

If cash is tight, it's tempting to repay only the minimum each month. Your card provider won't complain - in fact, it will be delighted, because it can take years, or even decades, to clear even relatively small balances, and cost you a stack of interest. So pay your debt down as fast as you can.

3. Foreign extras.

I used to blithely flash my Visa and MasterCard on holiday, until I discovered how much it was costing me. Most credit card issuers charge a foreign usage loading on spending, with the average fee creeping up from 2.65% to 2.82% over the past 12 months, Defaqto say. Plus you can pay a further 3% if you withdraw cash - withdrawing £100 could cost you £5.82. Now I use my Nationwide credit card, which charges nothing for overseas spending. Read Five Fabulous Credit Cards To Use Abroad for more info.

4. Balance transfer charges.

Even when banks play nice, you have to keep your eye on them. 0% balance transfer cards were so popular, issuers slapped on a 2.5% or 3% transfer fee. But fair play, balance transfers cards are still a great deal. At 2.98%, Virgin Money charges £29.80 for every £1,000 you transfer, but then you pay no interest on that money for 16 months. Transferring £1,500 would cost you £44.70, but save £338 in interest, compared to a card charging 16.9%. Total saving: £293.30.

5. Negative Payment Hierarchy.

But there is a catch. If you use your balance transfer card for purchases, your monthly repayment will go towards clearing your transferred balance (which doesn't attract interest), instead of your purchases (which attracts interest at the full rate). So the interest on your purchases builds up, month after month, and you won't start paying it down until you have cleared your balance. The solution? One of these cards for your balance transfer, and one of these for new purchases.

6. Default penalties.

If you miss a single monthly repayment you pay a penalty of around £12 and get a black mark on your credit record to boot. Set up a direct debit to cover the minimum repayment, or better still, do what I do, and clear your entire balance by direct debit every month - if your issuer will let you.

7. Interest-free days.

Credit card users assume they get 56 interest-free days on purchases, but issuers increasingly flout this unwritten rule. The average maximum interest-free period is down from 54 days to 52.6 days over the last 12 months.Virgin only offers 50 days, Egg Visa 45 days, and wait for it, Lloyds TSB Advance MasterCard grants zero interest-free days. That means you start paying interest from the moment you buy. If you have this card, cut it up now and clear the balance forthwith.

8. Cash advances.

Withdrawing cash on your credit card is financial madness, except in an emergency. You typically incur a cash advance charge, up from an average 2.62% to 2.74% in the last 12 months, plus hefty interest from the date of the withdrawal (even on a 0% card). Halifax All in One MasterCard charges a crushing 27.95%, while Lloyds TSP and Barclaycard charge 27.9%. That's gotta hurt.

9. Payment protection insurance (PPI).

As if credit card issuers didn't already have enough ways to whip money from you, they also try to flog you over-priced PPI as well. This typically costs around £120 a year but contains little protection, and plenty of exclusions.

10. Sneaky charges.

Credit card issuers don't just hike their APRs, but their cash withdrawal fees and interest rates, foreign usage charges, PPI premiums and balance transfer fees as well. You've got to keep a constant eye on them to avoid being diddled, and you really shouldn't have to.

So that's it, 10 reasons to suspect the banks and anybody else who offers you a credit card. And don't even get me started on store cards..

Compare credit cards at Fool.co.uk