Rachel Robson names and shames three of the worst credit cards on the market. Avoid these cards - or suffer the consequences...
Choosing a credit card isn't always easy. For a start, there are far too many to choose from. And secondly, many credit cards come with sneaky strings attached.
So in this article, I'm going to highlight some of the worst credit cards available, as well as possible alternatives.
Outrageous interest rates
One of the first things you should look out for when choosing a credit card is the rate of interest it charges. Frustratingly, many credit card providers have been sneakily upping their rates recently, and many credit cards - particularly store cards - charge astronomically high Annual Percentage Rates (APR).
One of the worst offenders is the Argos store card which charges 27.9% APR. By contrast, most credit cards charge around 16%.
If you had built up a debt on the Argos card, and could only afford to pay off the minimum monthly repayment (MMR) each month, it would take you a very long time indeed to pay off the balance in full. In fact, if you have a large debt, you may find that it takes decades to pay it off. Now, that's a scary thought.
The alternatives:
One alternative is to choose a 0% balance transfer card such as the Barclaycard Platinum card, NatWest Platinum Credit Card MasterCard or Royal Bank of Scotland RBS Platinum Credit Card MasterCard, all of which offer 0% on balance transfers for 15 months. By using these cards, you won't have to pay interest on any balance you transfer until October 2011!
But if you'd prefer to have a credit card that offers a permanently low APR, you could consider signing up for a lifetime balance transfer credit card. These cards offer a low rate of interest for as long as it takes to clear the balance.
One of the best options is the Barclaycard Simplicity Visa which offers a rate of 6.8% for every balance transfer and purchase you make! Simple.
Reward your spending
If you're going to be using your credit card purely for spending purposes, you'll probably like the idea of being rewarded as you spend. So if you enjoy jetting off on holiday every year, you might be tempted by air mile rewards.
There's just one problem - this isn't always as straightforward as it seems.
Take the Virgin Atlantic Black American Express card for example. This card allows you to collect two Flying Club miles for every £1 you spend, and you'll also be given 6,000 Flying Club miles with your first purchase. You can then use these miles towards a flight.
Sounds great, right? Well, there's a catch. Not only do you have to pay an annual fee of £115 for the card, but when you come to spend your Flying Club miles, you'll find passenger taxes and fees aren't included with the flight. Instead, you'll have to pay for these yourself!
So given that fees and taxes almost always cost more than the price of the flight itself, you're likely to find your bargain trip isn't much of a bargain after all.
The alternatives:
If you're a keen traveller and still want to use a reward credit card for flights, I think a far better option is the fee-free Lloyds TSB Airmiles Duo credit card. This card is part of the Airmiles scheme and you won't have to pay any tax or booking fees.
But my favourite card for purchases is the American Express Platinum Cash Back Card. This fantastic piece of plastic has nothing to do with jet-setting, but simply gives you cashback for spending. In the first three months, you can get 5% cashback, up to £100. After that, you can earn up to 1.5% cashback. All of which you can spend on your holiday...
Dirty tricks
One of my pet hates when it comes to credit cards is the dirty little trick known as negative payment hierarchy. In a nutshell, cards which operate negative payment hierarchy pay off the cheapest debts first, and the most expensive last.
Rachel Robson explains how negative order of payment works and how to avoid it.
Unfortunately many credit cards operate in this way. A classic example is the HSBC Credit Card. This credit card offers an interest-free period for 15 months on balance transfers and three months' 0% interest on new purchases. After that it charges 16.9%.
If you only used this card for a balance transfer, it would offer a very competitive deal. But let's say you transfer your balance of £2,000 onto the card and then start using it for new purchases. You might think that if you repay everything you spend on the card before the first three months is up, you won't have to worry about paying interest. But you'd be wrong.
Instead, thanks to negative payment hierarchy (also known as 'negative order of payment'), your monthly payments will go towards the £2,000 you transferred onto the card - in other words, the interest-free debt. And that means you won't have paid anything towards the new debt you've run up by spending on the card. So once those first three months are up, you'll be hit with an interest rate of 16.9% on this debt. And you won't be able to pay it off, until you've cleared the entire balance you originally transferrred. Ouch!
The alternatives:
One way to get around negative payment hierarchy is to use a credit card that has the same interest-free period for both purchases and balance transfers. And I think the Sainsbury's Finance Mastercard is the perfect choice. This card offers 0% on both balance transfers and purchases for 12 months, so you'll completely avoid negative payment hierarchy. Hurrah!
Alternatively, you could use one credit card for purchases and a separate one for balance transfers. This way, the ordering of payments becomes irrelevant.
But whatever you do when choosing a new credit card, make sure you pick the right one for your needs and don't get caught out by any nasty surprises! If you need any more help choosing a card, remember that here at lovemoney.com you can find out more about the best cards available.