Get savvy with your credit card today, or it'll cost you a fortune.
The government says it wants a better deal for consumers as it launches a new consultation on reform for credit and store cards this week.
If you ask me credit card companies should clean up their act now, but it'll almost certainly take some time before the government's proposals come into force.
I don't think you should wait that long. If you steer clear of the ten worst credit card mistakes, you won't fall foul of the card providers' sneaky tricks while they're still allowed to continue.
Here's what you should look out for:
1. Don't mix balance transfers and spending
If you move your balance onto a 0% balance transfer deal, one of the worst things you can do is use the same card for spending. This is all because of a particularly nasty trick known as negative payment hierarchy.
Most cards use your repayments to clear the least expensive debts first (such as 0% balance transfers) leaving more expensive debts (such as purchases) on the card longer to rack up a lot more interest.
Don't combine the two unless you have a card which offers the same introductory deal on both. Try the new Sainsbury's Credit Card which offers a 0% deal for 10 months (with a 3% fee). Watch this video to find out more about it.
Alternatively, use one card for your balance transfer - the market-leading Virgin Credit Card is a great choice offering 16 months at 0% (2.98% fee) - then use a second card for your spending such as the Sainsbury's Credit Card.
2. Don't pay your bill too late
In fairness, you can't blame the credit card company if you fail to pay your bill on time. Remember each late payment will cost you a whopping £12 in charges.
But you could be punished a whole lot more than that. If you have a 0% balance transfer deal, a missed payment could result in the interest-free period being revoked there and then, putting you back on the typical APR.
3. Or pay your bill too early
And don't be too keen with your repayments either.
If you pay your bill too early it could fall into the previous statement period so you effectively make two payments in one month, but none the next. This will count as a missed payment too. Make sure you check your statement dates so this can never happen.
You can avoid this quite easily by setting up a direct debt payment so your bill will always be taken care of.
4. Don't make the minimum monthly repayment
Minimum monthly repayments or MMRs are reducing all the time. This may sound like a good thing, but it's actually just a way of keeping card holders in debt for longer. A lot longer in some cases.
Take the Virgin Credit Card, for example. It's a fantastic card for balance transfers, but the MMR is just 1%. If you had a balance of £3,000 charged at the typical 16.6% APR, and you paid just 1% of your balance off every month, guess how long it would take to clear your card? Give up?
The correct answer is over 100 years! Or, to put it another way, you'll never pay it off. That's why MMRs are so bad.
5. Don't use your card for cash
Cash withdrawals are shockingly expensive and are usually charged at an astonishingly high APR.
Quite simply cash and credit cards don't mix. Worse still, if your card operates negative payment hierarchy, then cash withdrawals will normally be paid off last causing your interest bill to escalate even further.
6. Don't forget when your interest-free period disappears
Your credit card company will keep its fingers crossed and hope you'll forget when your interest-free deal is due to end.
That way it can start making some serious money out of you by charging the standard APR. Make a diary note now so that if you can't clear your balance within the introductory period, you can move it to a new 0% deal in good time.
7. Don't take the credit card offered by your bank
People often like to stick with the familiar, but I suggest you treat any financial product available from your own bank with caution. That doesn't necessarily mean your bank's credit cards will always be a poor deal.
But you should always, always shop around before you make your choice. You can do that easily by comparing cards at the lovemoney.com credit card centre.
8. Don't forget to cancel cards you no longer use
A note of all the cards you have will be kept on your credit record whether you have a balance on them or not. Credit providers may take a dim view of you as an applicant if you have a lot of empty cards because there may be a large quantity of credit potentially available to you.
This could affect your ability to borrow in the future, so cancel any cards you don't use any more now.
9. Don't accept automatic credit limit increases
This is another trick for keeping you in debt, which is happening all the more regularly. If your credit card company steps up your credit limit without asking you first, and you don't want to succumb to the temptation, ask them to leave things as they are.
10. Finally, don't max out your cards!
Again this isn't one you can really blame on your card provider, but just because you have oodles of credit that doesn't mean you should spend it. In these challenging financial times we should all be thinking about getting out of debt, not deeper in.
Get help from lovemoney.com
If you need a bit of help getting into the savings habit, we can help.
First, adopt this goal: Pay off your credit cards
Next, watch this video: The 3 worst things you can do with your credit card
And finally, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?
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