Even 0% cards can have a few tricks up their sleeves. Here's how to make sure you don't fall foul of one of the nastier ones.
There are around 75m credit cards in the UK, and although many people have fallen foul of this easily accessible form of credit, a good number of us do operate our credit cards cleverly. After all, by paying off your card in full, each month, and timing large purchases with statement dates you can benefit from up to 59 days interest-free credit.
0% cards
What's more, we can take this one step further. By taking out a 0% credit card for balance transfers, existing debt can be transferred to the card where it will accrue no interest until the 0% period expires. Depending on the 0% credit card you choose, you can gain up to a year of breathing space to pay off that balance in full!
Indeed, credit cards used properly can be fantastic tools -- either to help spread the cost of expensive items, or to give us time to clear debts. So what do we have to watch out for?
Well, although we know our cards can be useful I'm sure no one out there believes that credit-card companies are out to do anything but make money. Slip up with a payment and you'll fall foul of its fees and charges. What's more, 0% credit cards come with balance-transfer fees of at least 2% these days. But this is pretty straightforward stuff that we all know to avoid.
Negative Payment Hierarchy
Less obvious is a credit card's payment hierarchy. This is the order in which your provider pays off your various debts.
Different types of spending on credit cards accrue interest at different rates. Normal spending (such as retail purchases) is added to the balance. However, withdraw cash with a credit card and you'll typically be charged a 1.5% fee, plus the debt will start accruing interest straight away, without an interest-free period.
And although you'd think the most sensible thing would be for credit-card providers to use the money you pay it to clear the most expensive debt first (known as positive payment hierarchy) most do exactly the opposite, and pay off the cheapest debt first, such as 0% balance transfers, leaving the expensive borrowings to rack up interest.
Say Jim transferred his £2,000 credit card balance to a 0% card for balance transfers. His new card gives him 12 months interest free. Now, Jim decides to spend a further £50 on the card. When his statement arrives, he pays £50 to clear the new borrowing, and thinks that's that.
However, as his card employs negative payment hierarchy, his £50 card repayment goes towards his cheapest debt (i.e. the £2,000 0% balance transfer) meaning that the £50 of new spending will continue to accrue interest at 16%APR!
Unfair, right? Well nearly all credit cards employ this sneaky tactic; in fact, the only credit cards that employ positive payment hierarchy are from Nationwide Building Society. Indeed, Nationwide reckons that providers pocket a cool £500m each year from payment manipulation.
So how can you avoid it?
- If you take out a 0% card, transfer your balance and then cut up the card. If no further spending can be added, you can't accrue interest.
- Never use a credit card for cash withdrawals. This is an extremely expensive way of borrowing so use your debit card instead.
Alternatively, you could always use a Nationwide BS card -- they promise to use your payments against your most expensive debt first.
Unfortunately more and more of us fall foul of this scam, as 0% balance-transfer cards increasingly offer 0% periods for new purchases, too. But cut up that card and you can avoid this money-making banking trick.
> Interest Free Without A Fee!
> The 0% Credit-Card Traps
> Visit our Credit Card Centre.