Clean Up Your Credit Cards!

Fancy becoming a demon card player? Then here are eight ways to save money by knocking your plastic into shape.

One topic which I cover just about every week is how to use credit cards sensibly. I do this for three main reasons:

1.    Credit cards are so widespread -- there are around 75 million in circulation in the UK, used by over 32 million adults;

2.    The credit-card market is constantly evolving, with new offers being launched or withdrawn on an almost daily basis; and

3.    When credit cards turn nasty, they can utterly devastate your finances. I know this from bitter experience, having had major problems with plastic in the Nineties.

What's more, as a passionate anti-debt campaigner, I've made it my life's goal to help my fellow Brits to get out of debt. Thus, today I'm going to show you eight money-making tricks that credit-card firms use to grab more of your money. Here they are (in A-Z order):

1. Annual fees

Annual fees died out in the Nineties, but are making a comeback. Indeed, there has been a slow but steady trend over the past two years towards reintroducing annual fees for credit-card users. In many cases, firms have selectively introduced annual fees, usually targeting their least profitable customers.

Another sneaky trick is to introduce a low-usage fee of, say, £10 a year. I think that this really takes the biscuit: being charged for not using a service! So, do keep an eye on your monthly statements and watch out for statement inserts informing you of new or increased fees. Note that around 99% of credit cards don't charge annual fees, so paying one is largely optional in a competitive marketplace.

2. Card protection plans

The market for these plans is dominated by two suppliers: market leader Card Protection Plan (CPP) and its rival Sentinel. In return for a yearly fee of £15+, these firms provide emergency support and protection against fraud if your plastic cards are lost or stolen. One phone call and all your cards will be cancelled and re-ordered immediately, plus you are covered against fraudulent spending.

However, this is yet another expensive add-on to avoid, because the law restricts your liability to just £50 if you become a victim of credit-card fraud or theft. Hence, the underlying cost of providing this cover is a fraction of the market price, ensuring that these two firms enjoy astonishing profit margins.

3. Cash-withdrawal fees

Always use your debit card to get cash and NEVER your credit card, except in the direst emergencies. Is that a strong enough warning for you?

If you ignore my advice, then you'll end up paying sky-high rates of interest -- often in excess of 25% APR -- until your entire balance is repaid. In addition, you'll pay a withdrawal fee of around 2.5% of the amount withdrawn, with a minimum charge of, say, £2.50. What a rip-off!

4. Currency-conversion charges

Using the wrong credit card abroad (or on non-UK websites) can cost you a pretty penny. This is because almost all card issuers charge additional fees when you pay in a currency other than sterling. Typically, this currency-conversion charge adds up to 3% to the cost of foreign purchases. In addition, withdrawing cash from overseas cash machines incurs further fees, similar to those in point 3 above. To dodge these extra fees, use a credit card issued by Nationwide BS or the Post Office.

5. Interest rates

If you want to avoid paying interest, then be sure to pay off your entire balance each and every month. By doing so, you can enjoy from 45 to 59 days' interest-free credit, depending on your card, and earn up to 4% cashback on top.

On the other hand, if you do have an outstanding balance on your card which is providing difficult to shift, then you could be paying interest at a yearly rate of, say, 17%+. Interest rates are even higher for store cards, which typically charge over 25% APR. However, by transferring your balances to a 0% credit card, you can avoid paying any interest for an extended period. Indeed, Best Buy 0% cards can provide up to fifteen months of interest-free credit, as we revealed in this article. Alternatively, if you don't want to become a `rate tart' by constantly surfing between 0% deals, then try a low-rate lifetime balance transfer instead.

6. Fines

If you miss a monthly repayment, don't pay up on time, or exceed your credit limit, then your credit-card issuer will penalise you for improper use of your account. Until the Office of Fair Trading (OFT) took action against credit-card companies, these fines used to be as much as £30 per offence. However, the OFT forced card firms to reduce these unlawfully high penalties, and no card issuer now charges more than £12 per offence. To avoid these charges, be sure to pay some or all of your bill by monthly direct debit or standing order.

7. Minimum monthly repayments (MMRs)

As I warned in The Debts That Wouldn't Die, minimum monthly repayments are the spawn of Satan. If you owe £2,000 on a credit card which charges an annual interest rate of, say, 19.6% APR, how long will it take to clear this balance by paying an MMR of 2%? The answer is over 42 years, which is longer than any mortgage!

Instead of paying the absolute minimum each month, work out how much you can comfortably afford to repay each month and then set up a direct debit or standing order for this amount. By paying a fixed sum each month, you will get rid of your debt in months or years, instead of decades.

8. Payment protection insurance (PPI)

To my mind, payment protection insurance is the biggest financial rip-off in the UK today. This optional insurance meets your monthly repayments if you can't work due to an accident, sickness or unemployment, and pays off your balance if you die.

Alas, this credit card repayment protection is ludicrously overpriced, costing between £7 and £30 per £100 paid out. I've personally managed PPI schemes which reaped profits of over nine-tenths (90%) of the premiums collected. My expert advice is to cancel your CCRP policy today, unless you're in the process of making a claim or expect to make one soon.

Now, what are you waiting for? Go clean up your credit cards today!

More: Choose from our deck of great credit cards | When Balance Transfers Go Bad | Cheap Credit For Crafty Customers