The ten worst financial tricks

Get the lowdown on ten of the worst financial traps you need to keep your eye open for...

Banks love to make money at our expense. And that means there are plenty of sneaky financial tricks waiting to trip us up if we're caught unawares. So here are the top ten financial traps you need to watch out for...

1) Negative payment hierarchy

Here at lovemoney.com HQ, we regularly bang on about this dirty trick. And it's one you really need to be aware of.

The vast majority of credit cards operate negative payment hierarchy, which means any payments you make go towards your cheapest debts first. And your most expensive debt is paid off last.

So say you had a credit card which charged no interest on balance transfers for the first six months, but charged a rate of 18.9% on purchases. If you transferred a balance onto the card and then made a purchase with it, your payments would not clear the cost of the purchase. Instead, you would have to pay off part of your interest-free debt first (the balance transfer), while the new debt you ran up with your purchase would start racking up interest.

The best way to avoid this is to use one 0% credit card for purchases and a different 0% card for balance transfers. Alternatively, you could use a card such as the Halifax All In One Mastercard which has the same interest-free period for both purchases and balance transfers (nine months).

2) Withdrawal restrictions

I really hate it when savings accounts pretend to be 'instant access' or 'easy access', but then limit the number of withdrawals you can make in the first year. And if you go over this limit you're penalised.

For example, the Birmingham Midshires Access Reward Account (Issue 5), which pays 2.5% AER, only allows you to make four withdrawals in the first year. If you make more withdrawals than this, the rate drops to just 0.5%!

You're much better off with a true instant access account, such as the Egg savings account. This pays 2.8% AER and allows you to move your money whenever you like, with absolutely no penalties or restrictions.

To avoid this trap, make sure you check the small print thoroughly before committing to any easy access savings account.

3) Increased limits

Watch out when your bank 'kindly' increases your credit limit or overdraft limit. These limits are not targets. So if you've suddenly been given an extra £1,000 credit, it doesn't mean you have to go out and spend it. Being tempted to do so could lead you further into debt. Beware!

4) Minimum payment reductions

Similar to the above, if your bank suddenly reduces the minimum monthly payment on your credit card, don't get too excited. By paying off a smaller amount each month, you're simply increasing the time it will take to pay off the balance in full - meaning you'll be paying a lot more in interest.

So if your minimum payment is reduced, it's worth setting up a direct debit and paying a fixed amount on top of this each month.

For example, if you had a balance of £1,500 on a typical credit card, charging 17.9% APR, and paid the required minimum of 2% of the outstanding balance each month,* it would take you more than 20 years to pay back the balance in full. But if you set your monthly payment at £60 a month, it would only take you seven years to pay off the debt - and you'd save yourself £4,200 in interest. Double your monthly payment to £120 a month, and you'd be debt-free by February 2012, saving yourself £5,600 in interest in the process.

5) 0% traps

If you've just received your brand new sparkly 0% credit card, be careful! If you forget to make a repayment on time or miss one altogether, the majority of credit-card issuers will cancel your 0% deal. And that means you could be hit with a very hefty interest rate instead. Ouch!

One of the best ways to avoid this is to set up a monthly direct debit - and that way you won't forget!

6) Cash advances

Avoid using your credit card for cash withdrawals, otherwise you'll be hit with a withdrawal fee of around 3% as well as an eye-popping rate of interest. In fact, interest rates can be as high as 30% or 35% APR.

Unlike purchases, there's no interest free period for cash advances so you'll be charged from day one. And this means you'll be paying much more interest overall.

7) Credit card cheques

Credit card cheques are often conveniently attached to the bottom of bank statements and are marketed as the easy way to pay off other debts or make purchases.

But the problem is that they are treated in the same way as cash advances (above). This means you'll have to pay a handling fee, and you'll be charged a horrendous rate of interest - which could be as much as 30% APR! So steer clear!

Read more on alternatives to credit card cheques in Three brilliant ways to borrow.

8) Variable bonus rates

Watch out for variable introductory bonus rates on your savings account. For example, the Abbey Instant Access Saver offers a variable bonus rate of 1.5% for the first year. So there's absolutely no guarantee your bonus rate will stay at this level during that year. Of course, the rate could go up, but equally, it could go down - and until the base rate starts to rise, a reduction seems more likely.

The aforementioned Egg savings account, on the other hand, offers a fixed bonus rate of 1.55% so you know that's exactly what you will get for the first year.

9) Minimum payments

Many current accounts require you to pay a minimum amount into the account each month. Fail to do so and you could see your interest rate cut or you may be charged a fee. So make sure you can afford to pay in the required amount each month before you sign up to the account.

10) Recurring payments

If you've set up a recurring payment on your credit card for an annual subscription or service, and later decide to cancel your credit card, you need to be careful. Unlike a direct debit, a recurring payment won't automatically stop when you close down your account.

It's not even possible to cancel your payment by notifying your credit card provider. The only way to cancel the recurring payment is to ask the original merchant you set it up with to stop taking the payments.

For more advice, read Avoid this devious credit card sting.

So keep an eye out for all of these financial traps and make sure you don't get stung!

* Or a minimum cash payment of £5, whichever is the greater

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