Plastic can be fantastic, but it can also spell financial disaster if it's not handled correctly. Here's how to control your credit cards -- so they don't control you.
As the fifth member of call centre staff tried to flog me PPI for my new credit card, I began to get cross. Lenders certainly pile on the pressure when it comes to squeezing more money out of you.
However -- as they say -- it takes two to tango. Ultimately, we should all take responsibility for our own finances, and not simply blame it on the banking bogeymen when things go wrong.
With this in mind, I'm going to approach the subject from a slightly different angle. This article is about how you can manage your credit card properly -- and make the best deals work for you.
Don't break the rules!
A friend of mine recently took out a card which offered 0% on balance transfers for 15 months. Unfortunately, he failed to set up a direct debit on the card straight away. And by the time he'd remembered, he'd missed his first repayment date by one day.
What happened? Well, he had to pay a one-off penalty fee. But far worse, because he'd `defaulted' on the agreement, his 0% deal was whipped away from him as well. He's now forced to pay a sizeable amount of interest on the balance -- every month.
The best balance transfer deals are often `loss leaders' for the lenders that provide them. This means they're very keen to pounce on cardholders who pay late or miss their minimum monthly repayments.
To avoid this happening, it's best to set up a direct debit for the minimum payment every month (or more if possible) as soon as your application is accepted.
And remember -- you may need to transfer any balances within a set time (typically 60 days from the account opening). Otherwise. you've guessed it. the 0% deal is invalid!
Don't let your debt mountain grow
In recent years, card companies have cut minimum repayment levels. These days, many demand just 5%, 3% or even 2% of the balance every month.
So, are they being nice to cash-strapped consumers? Of course not! They're trying to make sure even more interest pours into their coffers.
If the interest rate on your card remains at 15.9% APR, and you only pay make the minimum 3% payment on a £3000 balance every month, it will take you 211 months to pay off your debt. That's more than 17 years - over which time you'll pay out a colossal £2,175.30 in interest. Eeek!
And it gets worse: If your £3000 debt is left on a card issued by MBNA, you will be allowed to make a minimum payment of £25 a month (instead of being forced to pay at least 3% of your balance). Again, MBNA is not being nice. If you only make this minimum payment every month, the amount you owe will mushroom completely out of control. As my fellow Fool Donna Werbner explained in The True Cost Of Credit Card Debt, after 25 years, you'll be crippled by debts of over £80,000, despite paying out £7,500 in interest.
So in a nutshell -- don't languish on your lender's minimum repayment rate if you can possibly avoid it.
Do your own research
When it comes to people flogging you credit cards, I'm tempted to say don't trust anyone.
Perhaps this is a bit harsh, but it's certainly true that bank and shop staff come under huge pressure to flog PPI and store cards - whether they're good value or not.
These salespeople's work targets, commission and bonuses can hinge on the amount of `extras' they manage to tempt, cajole or scare you into buying -- so it's not surprising they'll tell you they're the best thing since sliced bread.
Relying on the advice of sales staff could cost you a fortune. So do your own research: Britain's Worst Store Cards, by Fool freelancer Cliff D'Arcy, is a good place to start.
Code red!
Make sure you always have alternative methods of payment close at hand, in case something goes wrong with your credit card.
This is particularly true on trips abroad, where you may find it very difficult to get problems sorted out quickly, if at all. And cards can stop working for several reasons -- not just because you've exceeded your limit.
Unusual spending patterns can mean your provider temporarily the blocks the card until they've confirmed it's you who is using it.
And as we explain in Don't Let This Happen To Your Credit Card, if you have a positive balance on your card, it's also liable to be shut down.
It's bad enough when your card is declined in the UK. but somewhere you don't speak the language and can't phone your bank? Gulp.
Long-term back-up
It's also important not to rely too heavily on your credit card in the longer-term.
In a recent survey, one in eight Fools (12%) told us they'd had their credit card limits cut.
And remember that your provider could cancel your card completely at any time. As this article explains, some 161,000 Egg customers found themselves in exactly that position earlier in the year.
One size does not fit all!
Finally, you need to decide exactly what sort of credit card will suit your purposes.
A fantastic balance transfer card, for example, could be disastrous for new spending.
And the best cashback card on the market may charge whopping amounts of interest if you don't pay it off, in full, every month.
I like to use the car analogy: A two-seater sports car isn't much good for a family. and a people carrier may be a total waste of money for one person. An armoured tank. well, you get the idea.