We reveal five of the worst credit card rip-offs, ever! And their potential cures...
It's not often I agree with Peter Mandelson. But this week, while watching Mandy on TV, I found myself nodding in agreement with Labour's political phoenix.
The business secretary held a summit with the credit card industry earlier this week to discuss mounting concerns that customers are still losing out despite recent heavy reductions in the cost of wholesale borrowing.
Of course, it's not the first time credit card companies have come under fire for unfair practices. In 2006, the industry was ordered by the Office of Fair Trading to cut late payment fees to a maximum of £12.
However, this only made companies craftier, and many subsequently hiked-up other charges such as cash withdrawals and balance transfer fees in order to compensate for lost revenue.
The truth is, if you know how to use them, credit cards can be your best friend. If you don't, they can quickly turn into your worst enemy.
So, here are my five top credit card crimes, and the steps that I think Mandy and the government should take to tackle them:
Negative payment hierarchy
Let's say I have a credit card and make a 0% balance transfer of £1000, and a purchase of £500, for which I am charged 18.9% APR. I then decide to pay £500 towards my card, thinking it will prevent me from having to pay any interest.
However, as my card operates negative payment hierarchy, my cheapest debts are paid off first, meaning the payment actually goes towards the 0% balance transfer, not my purchase (which continues to rack-up lots of interest).
Nearly all cards (except Nationwide) operate in this way, so you should be particularly wary about making purchases if you also have a 0% balance transfer on your card. Watch out for cards with uneven promotional periods, such as those that offer 0% for 12 months on balance transfers, but only 0% for three months on purchases. These are the very cards which will trap you.
In short, make sure your credit card has a 0% period for purchases that lasts as long as the 0% period for balance transfers. If the 0% on purchases lasts for a different length of time than the 0% on balance transfers, use your card for one purpose or the other -- not both, or negative payment hierarchy will catch up with you.
To clear up any confusion, I think all cards should - like Nationwide cards - operate positive payment hierarchy. With positive payment hierarchy, the opposite happens: you pay off your most expensive debt first, and leave your cheap debt till last.
In my opinion, companies do not make the hierarchy of payment allocations clear when you apply for a card, and often it's up to you to find that `summary box' or scour through the small print to find out about this catch.
This puts a sting in the tail of what you thought was a good deal, and is something that needs to be stamped out to avoid unnecessary, and deceptive charges.
High APRs
Shocking APRs and headline-grabbing swindles aren't just the product of loan sharks, and as my colleague Rachel Robson highlighted last month, credit cards with APRs of 222.7% were being offered by none other than high street retailer Argos.
APRs are often complicated and confusing. Many people do not understand what the APR means when they sign on the dotted line. As a result, what sounds like a good deal at the time nearly always ends up costing more than you bargained for.
Mandelson's main criticism of credit card companies is that while the base rate has come down significantly over the past few months, many credit card APRs have in fact gone up.
According to Moneyfacts, since August, 16 credit cards have actually increased their purchase APRs while 12 cards have increased their cash withdrawal rates.
I doubt we'll ever see the day credit cards rise and fall in line with the base rate. I do, however agree with Cliff D'Arcy that credit card APRs should be capped so companies are prevented from taking advantage of the most vulnerable - charging rates that are simply unfair.
Cash withdrawal charges
Without a doubt, a cash withdrawal using your credit card is one of the most expensive ways of borrowing.
As you soon you withdraw the money, not only are you slapped with a cash advance fee costing between 2% to 3% of the amount, but you'll also be charged a higher rate of interest on it than you would for purchases - sometimes as high as 30 to 35% APR.
And, unlike purchases, there is no interest free period for cash advances, so interest is charged from day one. So, not only are you paying a higher rate of interest to take cash out on your credit card, but as there's no interest free period for cash advances, you pay much more interest overall.
Credit card cheques are another evil of the credit card world. Often conveniently attached to the bottom of your statement, they are marketed as the easy way to pay bills, or top up your bank account with well-needed cash. However, this comes at a price, and borrowing in this way will cost you the same as a regular cash advance.
Of course, for some there is no other alternative than to borrow on a credit card, but APRs of 30% are simply unfair and should be brought back in line with purchase APRs. For example, Barclaycard's Platinum credit card has a typical purchase APR of 14.9%, but charges 27.9% APR for cash withdrawals. Where's the fairness in that?
Unfair interest charges
We've all seen this tale of woe in consumer columns up and down the country. Someone who always pays their balance in full each month makes a one-off miscalculation and underpays their credit card bill by a matter of pounds.
However, when they next get their statement, they discover they've been charged interest on the entire balance, and not just on the outstanding amount.
Cliff D'Arcy's story of a reader who fell foul of this trap certainly provided me with some food for thought, with an underpayment of just £5 ending up costing her £50 in interest charges.
I think interest charges should be changed to reflect the amount you've actually paid off instead of employing the all or nothing approach. After all, if you have taken the initiative to pay more than the minimum monthly payment, you should be rewarded, not punished for doing so.
Minimum payment reductions
So your credit card company has reduced your minimum monthly repayment. Cause for celebration? Think again.
Halifax caused a storm last month over the decision to slash minimum payments on its cards. You may think it isn't a big deal, but several card companies, including MBNA and Halifax have been reducing minimum monthly repayments without informing customers of the potential consequences.
For example, if you had a balance on your credit card of £1,000 and paid 2% of the outstanding balance each month, it would take 400 months (that's over 33 years!) to pay back the balance (assuming your APR was 18.9%).
By simply adding an extra £10 to your monthly payment, you'd reduce the time taken to pay it back to just 77 months (just over six years), and save yourself an astounding £2,193.23 in interest.
If your credit card company reduces your minimum payment, you could always set up a standing order and pay a fixed amount each month on top of it. As you can see, even an extra £10 each month makes a difference.
In addition, I feel companies should do more to reward those who pay more off their balance each month, and follow the example of cards such as Barclaycard's Flexi credit card. With this card, the more you pay back of your balance each month, the lower your APR becomes, and the less interest you'll be charged on the outstanding balance.
Whatever the outcome of Mandy's meeting, one thing is for certain -- the credit crunch is far from over. However, credit card companies can do a lot more to ensure their customers don't slip into the red unnecessarily, and these small steps can make the difference between being able to manage your finances... and seeing them spiral out of control.
More: 88% Of Us Don't Know This About Our Credit Cards / The Best Credit Cards For Christmas Spending