Seven More Reasons To Fear Credit Cards

Here are another seven reasons to be wary of your flexible friends...

In part one of this article, we showed you seven tricks and traps to avoid when using credit cards. Without further ado, here are another seven plastic rip-offs to steer clear of:

8. Interest rates are too high

At present, the Bank of England's base rate is 5.25% a year, yet a typical credit card charges more than 16% APR on purchases, and even more on cash withdrawals. In my view, this margin (more than ten percentage points over the base rate) is too high. Of course, by keeping interest rates high, banks makes higher profits from our addiction to spending on credit, so don't expect rate cuts any time soon.

9. Late-payment charges

Until last year, most credit-card issuers would levy a penalty charge of between £20 and £25 if you missed a payment, failed to pay on time, or exceeded your credit limit. However, following enforcement action from the Office of Fair Trading (OFT), no card issuer now charges more than £12 per offence.

Nevertheless, as an ex-banker, I know for certain that the true cost of dealing with these problems is measured in pence, not pounds, so I firmly believe that the card issuers got off lightly. Then again, recovering unfair bank and credit-card fines is a doddle, if you read our ultimate guide to reclaiming your money!

10. Minimum monthly repayments mean misery

Minimum monthly repayments (MMRs) are the work of the Devil. Until the mid-Nineties, credit-card issuers would demand an MMR of at least a tenth (10%) of an outstanding balance. However, fierce competition for customers has whittled this away such that most card issuers now require an MMR of 3%, 2.5%, even a measly 2%.

Of course, the lower the MMR, the longer it takes to repay your debt. Indeed, as MMRs mainly consist of interest and other charges, they hardly chip away at your debt at all. For instance, let's say that you owe £2,500 on a credit card which charges an interest rate of 1.5% a month (19.56% APR) and has a minimum monthly repayment of 2.5% (minimum £5). If you pay only the bare minimum, you will repay this debt in 26 years and one month. Over the decades, you cough up a total of £6,058, which is your original debt of £2,500 plus interest of £3,558.

Therefore, avoid MMRs like the proverbial plague!

11. Negative payment hierarchies bump up the cost

Be very wary of transferring a balance to a 0% credit card and then taking this card shopping. Unless your 0% deal also extends to purchases, you will pay standard rates of interest on your spending. This is because almost all credit-card issuers apply what's known as a 'negative payment hierarchy'. In other words, your monthly repayments first go towards repaying your cheapest debt, such as a 0% balance transfer, leaving your most expensive debt to accrue interest. Nationwide BS is the only major credit-card issuer not to use this sly trick.

12. Payment protection insurance is hugely overpriced

As I warned in Millions Conned By Card Cover, credit-card issuers charge extortionate premiums for payment protection insurance (PPI). Also known as credit card repayment protection (CCRP), this optional insurance meets your monthly repayments if you are unable to work due to an accident, sickness or unemployment. This protection is up to ten times as expensive as it should be, so don't buy it -- unless you like being mugged, that is!

13. Credit cards encourage you to spend more

When spending on credit cards, we often splash out more than we initially intend to. Indeed, Keith Tondeur of money education charity Credit Action warned that paying with plastic encourages us to spend around a third (34%) more. Tondeur's report, Escape from Debt, was originally published in 1993, and I imagine that this overspend will be much worse these days. Thus, if you find it hard to resist impulse purchases, then steer clear of credit cards.

14. Twelve different ways to calculate interest

According to consumer group Which?, the UK's top twenty credit-card issuers charge interest in twelve different ways. This makes a mockery of Annual Percentage Rates (APRs), because a card with a 'higher' APR can be cheaper than one with a 'lower' APR, depending on how each calculates interest. Thus, Which? recently made a super-complaint to the Office of Fair Trading, asking it to introduce a standardised formula for calculating credit-card interest.

So, there you have it: fourteen tricks and traps to beware of when using your credit cards. However, the game doesn't stop there, so please keep your eyes peeled for any new scams and swindles -- and tell us about them!

More: Watch Out For That 0% Credit Card! | Credit Card Freebies