Six golden rules for credit card spenders
It might appear to be your plastic best friend, but if you don't follow these six golden rules, your credit card can quickly become your worst enemy.
I was absolutely rubbish with my first credit card.
I didn't pay it off in full each month and kept spending on it long after the initial 0% interest period had ended, running up a nice little debt. I even used it to withdraw money when a bit stretched on a big night out.
As a result, I saddled myself with a lump of debt that I am still paying off now, suitably chastened. If you follow my credit card dos and don'ts list, then you can learn from my mistakes, without ever having to repeat them!
1) DO set up a direct debit
Missing a credit card payment is a nightmare. Not only do you get hit with a nasty charge (typically of around £12), but that missed payment is added to your credit record.
And as discussed in The secret way banks monitor you, right now a missed payment is just about the worst thing you can have on there - it gives the banks all the ammunition they need to turn you down for future credit applications.
Ideally, of course, you should set up a direct debit set up to pay off your balance in full each month. But if you can't manage that, then you should at least set up a standing order to meet the monthly minimum repayment. This is typically 3% of your outstanding balance, but double-check with your card provider to make sure.
2) DON'T stick to making the minimum payments
If you are going to set up that standing order for the minimum monthly repayment, try to top it up every month with an extra payment.
Why? Because if you only make the minimum payment each month, you will only be making a small dent into your debt. As a result, you will never properly get on top of your credit, and will end up forking out a lot more in the long run.
If, for example, you fork out £2,000 for a badly needed holiday on a credit card, which charges the typical APR of 16.9%, and stick to the minimum payment of 2% each month, it will take you 420 months to pay off that debt. That's more than 35 years!
Do not fall foul of the minimum payment trap. Avoid, avoid, avoid!
3) DO stick to the 0% periods
This is just common sense really - there is no point in paying interest if you can avoid it.
Here's an example. I've just booked up the honeymoon for myself and my fiancé this Christmas. Thanks to the cost of the wedding, we don't have the money upfront.
However, I have the Tesco Clubcard Credit Card, which offers 0% interest on purchases for 12 months. So we have worked out exactly how much we need to pay each month, in order to avoid being left paying interest on an outstanding balance in a year's time.
It's exactly the same with balance transfers - work out how much you need to pay each month to avoid going past the 0% interest period.
And if you are coming close to the end of the promotional period with your credit card, and need some extra time, don't just sit there and take it - shop around for a new card!
4) DON'T fall foul of negative payment hierarchies
This is really important, although it sounds quite technical.
A negative payment hierarchy is a very sneaky tactic employed by credit card providers which ensures your payments go towards clearing your cheapest debts first.
Say I have a credit card which currently offers 0% interest on balance transfers, but charges 16.9% on purchases. I have moved over £4,000 from a previous card, but have just bought a new fridge for £1,000.
If I pay £1,500 towards that bill, I'd like to think that I will completely wipe out the debt run up by my £1,000 purchase, as well as making a £500 dent into the existing balance. But because of negative payment hierarchy, my payment will all go towards clearing my cheapest debt - namely, the 0% balance transfer - before any goes towards the cost of my new purchase.
So, instead of having £3,500 to pay off at 0% interest, I will have £2,500 to pay off at 0% interest, with that £1,000 purchase on the side, racking up interest at 16.9%. Ouch!
And I'll be stuck. I won't be able to clear that £1,000 of expensive debt until my existing £3,500 balance is paid off completely.
Cards which don't employ this trick are as rare as an England Ashes win, but they do exist: Nationwide and Saga operate positive payment hierarchy, for example, which means your payments are allocated to your interest-bearing debt before any interest-free debt.
But perhaps the best option is the Halifax All In One Mastercard, which offers 0% on both purchases and balance transfers for nine months. Because the 0% period is the same for both types of debt, you don't have to worry about negative payment hierarchy with this particular card.
In all other cases, be on your guard and don't get caught out.
5) DO make the most of your card
You can get all sorts of brilliant bonuses from using your credit card.
The best, in my view, is the extra protection you get when you spend more than £100 on your credit card, as your provider then becomes equally liable to refund your money, should anything go wrong with your purchase. This is your legal right, under Section 75 of the Consumer Credit Act.
However, it is far from the only benefit. For a full rundown of the clever ways you can use your plastic, you might want to look at Play your (credit) cards right with these tricks!
6) DON'T use your card abroad
It simply isn't worth it - it costs a fortune to use your plastic overseas, as you will be whacked with extra charges.
If you absolutely have to spend overseas, make sure you get the best card for spending abroad. Have a read of Top new card for holiday spending has a big catch to get up to speed on what to expect from such cards.
Your best friend
Credit cards can be your best friend if you use them properly. However, if you don't follow these essential rules, they can quickly become your worst - and most expensive - enemy.