Four credit card rip-offs and how to avoid them
Takes these steps to ensure your flexible friend doesn't become your worst enemy!
'Credit' has become a dirty word in recent months, and we can all see why. But I think there's still a place for plastic, even in the current economic climate.
Play your credit cards right and you could bag yourself an interest-free loan or free money. They could even help you get through the recession in decent financial shape.
However, you need to know the rules of the game and the rip-offs to avoid. If you don't stay on the ball, your card provider will make an enormous profit out of you and spit you out at the end.
Here's my rundown of four credit card scams and how to avoid them.
Negative payment hierarchy
If a card operates negative payment hierarchy, your repayments will go towards clearing your cheapest debt first. This means that while your 0% balance transfer debt is being cleared, your new purchase debt will remain on your card, racking up lots of interest.
Most credit cards operate negative payment hierarchy. This isn't surprising given the profits it helps them make!
How to avoid it
There are two ways of dodging this sting. The first is to choose a card with a 0% purchase period that lasts as long as its 0% balance transfer period. This means that neither debt is more expensive than the other.
A good example is the Halifax All in One MasterCard, which has 0% balance transfer and 0% purchase periods that both last nine months.
Your other option is to go for a card that operates positive payment hierarchy (so it pays off your most expensive debts first). The Nationwide Visa Classic is one of the few that works in this way.
Harsh penalties for small mistakes
The best interest-free balance transfer deals may not always make huge profits for the providers involved. But as soon as you miss a payment, pay late or exceed your credit limit, your credit card company will be very quick to pounce on your mistake.
You'll probably be charged a penalty fine - typically £12 for every 'offence'. Even worse, your 0% deal is likely to be whipped away and you'll end up paying a hefty rate of interest on your remaining balance. Aargh.
How to avoid it
To avoid any possible defaults, set up a direct debit for the minimum monthly payment (more if you can afford it) as soon as your application is accepted.
And if you're taking advantage of a 0% balance transfer deal, move that balance as soon as possible. Most card providers give you a limited transfer 'window' (typically 60 days) after which the 0% deal is invalid!
APRs creeping up
Although the base rate has dropped like a stone in recent months, many credit card providers have been sneakily edging their APRs up.
According to Defaqto, the average APR crept up from 16.8% to 17.7% in the 12 months to January. My colleague Cliff D'Arcy recently argued that credit card APRs should be capped to protect the most vulnerable in society - and I completely agree.
How to avoid it
Don't let your credit card company get away with it. Keep a beady eye on your statements - and if the APR on your credit card does edge up, vote with your feet.
If you want a low APR that stays put, consider taking out a lifetime balance transfer credit card. Essentially, these cards offer a low rate of interest for as long as it takes to clear your balance.
For total rate consistency and peace of mind, choose one that offers a fixed APR, rather than a variable one.
The minimum payment trap
In recent months, several card providers have reduced their minimum monthly repayment levels without explaining to their customers what this means for their debt.
The lenders aren't being nice by lowering the amount you have to pay every month - oh no. In fact, the smaller your monthly repayment, the longer it will take you to pay off your debt, and the more overall interest you'll have to pay. And that means more cash for your provider's coffers.
In this article, my colleague Donna Werbner does the sums to show just how terrifying your debt can become if you only make minimum payments. You could end up shelling out thousands in interest alone - and still be in debt in a decade!
How to avoid it
Don't let your credit card provider take you for a mug. If it reduces your minimum monthly payment (or even if it doesn't), set up a standing order to ensure you're paying as much as you can possibly afford every month.
Find the credit card that's right for you with lovemoney.com
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