Seven Reasons To Fear Credit Cards

Your plastic may appear fantastic, but you need to be alert to these tricks and traps!

If you don't learn how to control your credit cards, then -- sooner or later -- your credit cards are going to end up controlling you.

I know exactly how it feels to be working for banks and other lenders, as I spent a fair part of the Nineties labouring under the weight of up to thirteen maxed-out credit cards. Having weaned myself off my addiction to overspending, I've vowed not to 'do' debt again. So far, so good.

Although I've had my 'light-bulb moment' and now know how to play the credit-card game to my advantage, the same can't be said for Brits in general. At the end of 2005, there were almost 75 million credit and charge cards in the UK, but only 48 million adults. What's more, at the end of February 2007, we owed around £55 billion on our credit cards, with three-quarters (75%) of balances being interest-bearing.

Thus, it seems to me that, on the whole, we don't enjoy an ideal relationship with our flexible friends. If you'd like to get wise to the tricks that credit cards play, then read on. By the way, the following topics are in alphabetical order, and I will reveal seven more traps after the Easter break in part two of this piece.

1. Annual fees are making a comeback

Throughout the Eighties and early Nineties, annual fees were the norm, as most credit-card issuers levied them. However, aggressive competition from the likes of the 'American Eagles' (Advanta, Capital One, MBNA, etc.) saw annual fees all-but-abandoned in the mid to late Nineties.

Sadly, as lenders attempt to cope with rising bad debts and an enforced reduction in late-payment fees, annual fees are now making a comeback. More than a dozen cards now levy annual fees, and firms such as Lloyds TSB and MBNA are selectively introducing annual fees, targetting unprofitable customers and dormant accounts. So, keep a close eye on your monthly statements, in case your card issuer decides to spring an annual fee on you.

2. Balance-transfer fees are rising

If you're paying interest on your credit-card debts, try transferring them to one of the dozens of cards which offer introductory interest-free periods lasting from five to twelve months. These 0% balance transfers cost card issuers a lot of money to subsidise.

So, lenders have responded by bringing in transfer fees to offset the cost of providing interest-free credit. If you opt for a 0% balance transfer lasting six months or more, then expect to pay a fee of, say, 2% to 3% of the value of each transfer.

3. Card protection plans aren't worth it

Last year, I acquired a new credit-card and, sure enough, the annoying sales calls began. One product on offer was a card protection plan from the likes of CPP and Sentinel. This cost £29 a year and provided protection against losses due to fraud and theft. Naturally, I turned down this kind offer, explaining that the true cost this product should be about £3 a year. Also, the Consumer Credit Act limits my liability against fraud to just £50 -- and card issuers usually waive this sum.

4. Cash interest rates are extortionate

If you use a credit card to withdraw cash from a cash machine or over the counter, watch out for two things: cash-withdrawal fees (see point 5) and sky-high rates of interest. Although a typical credit card will charge an interest rate of around 16% a year on purchases, interest rates for cash withdrawals are far higher -- anything from 20% to 30% a year. Even worse, you lose your normal interest-free period of between 45 and 56 days). Ouch!

5. Cash-withdrawal fees are steep

As well as attracting higher interest rates and forfeiting your interest-free period, making cash withdrawals on credit cards racks up additional fees. Until last year, this fee was, say, 2.5% of the amount withdrawn, with a minimum charge of £2.50. However, cash-withdrawal fees are on the rise, with many issuers now charging 3% (minimum £3). So, get the message: credit cards and cash don't mix. Stick to making fee-free, interest-free cash withdrawals with your debit card.

6. Credit-card cheques are a rip-off

Unsolicited credit-card cheques are of my pet hates. Indeed, I've closed more than one account because a card issuer kept sending them to me. The big problem with credit-card cheques is that, nine times out of ten, they are treated in a similar fashion to cash withdrawals. Thus, although they offer 'convenience and flexibility', these benefits come at a high price. (While most credit-card cheques charge high rates of interest plus handling fees, look out for low-cost balance-transfer cheques which charge low rates of interest and could save you money.)

7. Foreign usage fees gobble up your spending money

When you spend on a credit card abroad, buy from an overseas website, or pay for goods in currencies other than sterling, all but a few credit cards charge you an extra 'foreign currency conversion' fee. Typically, this adds 2.75% to the cost of overseas purchases, or £5.50 for every £200 spent. To avoid paying this unnecessary fee, be sure to take the right plastic abroad. The following cards don't levy this charge, both in EU states and worldwide:

In addition, watch out for fees for making withdrawals from cash machines abroad, which are broadly similar to those charged here in the UK.

Finally, watch out for part two of this exposé of credit cards next week.

More: Credit Card Freebies | Credit Card Crackdown