Don't fall for these credit card tricks

New proposals this week reveal credit card companies are sneakily trying to get away with screwing us all over, by pretending to help us. Here's what you need to watch out for.

The credit-card industry has put forward its opening offer to reduce the expensive, sneaky booby traps contained within its small print after receiving increasing pressure.

Criticism from consumer sites such as lovemoney.com, from debt charities, and eventually from an initial report by a Government department, the Department for Business, Innovation and Skills (BIS), has forced the industry to open negotiations for improvements in its practices. Yesterday it revealed some pre-emptive changes: an effort designed to head off more stringent regulation.

Let's take a look at what the card industry has proposed to do.

Big cuts in negative payment hierarchy

'Negative payment hierarchy' is a fancy term to describe how your debts are paid off on all but a couple of credit cards. When you make a payment, it is allocated to reducing the cheapest debt first. It'll be deducted from 0% offers first, for example. If you also have a purchase on your card at 16% APR, that will remain on the card, incurring interest each month.

For years we and many others have been campaigning for this to be reversed.

The industry is proposing to do just that on all payments above the minimum repayment. Anything you pay over and above the basic monthly payment will go towards the most expensive debt, whilst the minimum payment amount will still just pay off the cheaper debts. This could significantly reduce the cost of this, one of the most widespread, costly and devious of card tricks, for anyone who routinely overpays.

Yet it's not enough

Still, it's not going far enough, as no one can believe the practice should remain even on minimum payments: not when a Government report finds that 70% of people don't know that this is happening to them. Making repayments more complicated is not going to make it any easier for people to understand.

There are other problems. The poorer customers, still, and once again, are the ones most likely to continue taking the full brunt of negative hierarchy, as they are least likely to be able to pay above the minimum amount. Plus, card providers may do clever things with the minimum payment, changing it to suit them for each customer and even changing the definition to something more flexible.

The other potential downside is that the Government accepts this proposal and doesn't push for what clearly should happen: a total reversal of negative payment hierarchy.

There are a few ways we can get around this despicable trick already. We'll get to that at the end.

Unsolicited credit limit increases

Another target of the BIS report is the industry practice of increasing your credit limit when you didn't ask for it. Not only does this encourage more borrowing, but it can make your credit record look worse, decreasing your chances of getting other loans or a mortgage.

The industry is offering to give a 30-day notice period before putting up your limit, in which time you can contact them to reject the offer.

This is naturally better. It's useful for those of us who understand the damage that can be caused by a higher limit. However, it's no good for the majority of people, who don't understand. What's more, I would rather have to opt-in when I want to, rather than be forced to opt-out.

The industry is also promising a complete ban on unsolicited credit-limit increases for customers facing financial difficulties. However, this could turn out to be a meaningless ban, because the card companies don't normally increase credit limits on a card when the customer has defaulted a few times.

More information for customers

Card companies will contact customers who repeatedly pay just the minimum to tell them this is expensive. Whether the cost will be clearly explained and cheaper alternatives given, or whether it'll be used as an opportunity to cross-sell additional products, remains to be seen.

If I sound cynical, I have good reasons to be. There are more than two dozen deliberate traps in credit-card small print. You can read about the most significant in Beware these 19 credit card tricks!

The industry's proposals are clearly just an effort to kill off further discussion and much-needed regulation by making some small sacrifices. They're still trying to screw all of us over, whatever they say!

To be fair, though, it's a step in the right direction. Whatever happens now, we can expect at least some improvements in the future. Hurrah!

While we wait for action

Whilst we wait for these improvements, we can avoid negative payment hierarchy ourselves by using either the Nationwide and SAGA cards, which don't use this nasty trick, or by getting cards with 0% deals on both purchases and transfers which are the same length, such as the Sainsbury's Finance Card, which offers interest-free purchases and transfers for 10 months.

 The final and simplest route you can take is to use your credit card for one purpose only (e.g. just for purchases or just for transfers). Never use your cards for cash withdrawals or for the credit-card cheques, as both incur fees and interest from day one at an extortionate rate - as well as negative payment hierarchy!

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