The five worst credit rip-offs... ever!

Thank to the credit crunch, borrowing has become more expensive. So, be sure to steer clear of these swindles.

It’s been a tough couple of years. Not only is credit harder to obtain, but with interest rates creeping up on credit cards, personal loans and overdrafts, many of us are being forced to tighten our belts.

This is in spite of the fact that the Bank of England Base Rate has remained at 0.5% since March.

So, the price of being in debt is going up, but our problem doesn’t end there. That’s because the interest rates we pay tell only half the story. Other charges, fees and sneaky tricks also work to push up the cost of credit. So, whatever you do, watch out for these costly credit cons:

1.    Negative order of payment

Let’s say that you have the following transactions on a credit card:

•         A balance transfer of £2,000, charged at 0% APR for 12 months; and

•         Retail spending of £500, charged at 16.9% APR until further notice.

Now, let’s say that you make a monthly repayment of £200 to this card. Guess which debt this goes towards paying off first That’s right: the cheaper 0% balance. In other words, until you’ve repaid your entire balance in full, you will be charged interest on this £500 of retail spending.

This sneaky trick, known as a negative order of payment, is used by the majority of credit cards. Fortunately, however, from September, credit card companies will no longer be allowed to operate negative order of payment. Instead, they will have to switch over to positive order of payment where the most costly debts are repaid ahead of any others.

In the meantime, however, you can avoid this trick by never using a 0% balance transfer card to go shopping, unless you’re absolutely certain that you won’t be charged interest on this retail spending.

2.    Paying monthly insurance premiums

Insurance companies would prefer you to pay your yearly premium for, say, car insurance or home insurance as a single, upfront sum. This is because one-off payments are cheaper and easier to process than monthly premiums. Nevertheless, some generous insurers allow you to spread the cost of your cover over 12 months without charging interest.

On the other hand, some crafty insurers make a pretty penny by charging sky-high interest rates for the ‘convenience’ of paying in instalments. Typically, these firms charge interest at between 16% and 30% APR on monthly premiums. Hence, you’re far better off grabbing a year’s interest-free credit by paying your premium using a 0% on new purchases credit card such as the Tesco Clubcard Credit Card which offers 0% on all purchases for 13 months.

3.    Payment protection insurance (PPI)

In my view, no coverage of financial swindles would be complete without some mention of the dreaded payment protection insurance. In theory, PPI pays out monthly benefits following accident, sickness or unemployment. In practice, PPI policies are complicated, riddled with loopholes and get-out clauses, frequently mis-sold, and astonishingly overpriced.

For the record, adding PPI to a loan, credit card or overdraft can increase the size of your debt by up to a third (33%). Thus, over the life of a debt, premiums for payment protection insurance can add thousands of pounds to its overall cost. So, never buy this cover from a lender, and make sure you buy it from an independent source instead.

Just recently, in a positive step for consumers, Lloyds TSB announced it would no longer be selling PPI to customers who borrow money. Let's hope more lenders soon follow suit.

4.    Store cards

Way back in the early Nineties, when I worked on the ‘Dark side’ of financial-services, I wrote a review of store cards entitled “The Devil’s Debt”. I’ve used this phrase many times since, and also describe store cards as ‘the crack cocaine of credit’. This is because store cards are easy to come by, but, thanks to their astronomical interest rates, they can do a lot of damage to your financial life!

Following an investigation by the Competition Commission, new regulations governing store cards were introduced on 1 May 2007. Alas, these rules have failed to clean up this market. Today, store cards can charge an interest rate of around 30% APR, compared with the 16.9% APR typically charged by standard credit cards.

In other words, store cards charge around 50% more interest than credit cards, which is half as much again. So, if you owe money on a store card, then move your debt to a 0% balance-transfer credit card today. A good example is the NatWest Platinum Credit Card MasterCard which offers 16 months interest-free on all balance transfers - so you won't have to pay any interest on your debt for over a year!

5.    Withdrawing cash on a credit card

You should always use your debit card -- and not your credit card -- to withdraw cash from cash machines or over the counter. This is because all but a few debit card withdrawals come free of charge. On the other hand, credit cards charge withdrawal fees and eye-popping rates of interest on cash withdrawals.

Indeed, it’s not unusual for cash withdrawals on credit cards to attract an interest rate of between 20% and 35% APR. On top of this, there’s a cash-withdrawal fee of around 3% (minimum £3). So, taking out a tenner on your credit card could cost you almost half as much again in interest and charges. Oops.

In summary, if you don’t want to be taken for a ride by lenders, then always look beyond the headlines. Otherwise, you may fall foul of a whole host of high charges hidden in the small print!

This is a classic article which has recently been updated.

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