Top four credit card rip-offs

Don't let your flexible friend become your worst enemy. Watch out for these four credit card stings!

Credit cards can save and make you money. Used cannily, they can act as interest-free loans and can even help you climb out of debt. However, make no mistake; handle them incorrectly and they could also lead you into a world of financial trouble.

Here are my top four credit card rip-offs, along with tips on how to avoid them. Don't get stung by the plastic in your pocket!

Negative payment hierarchy

This crafty practice may sound complicated, but it's really important you get your head around it, because the vast majority of card providers try to rip you off in this way.

In a nutshell, it's all about how your repayments are ordered. A card operating negative payment hierarchy will use any payments you make to clear your cheapest debt first (that which is charging the lowest level of interest).

So for example, a balance transfer charged at 0% interest will be cleared before new purchase debt charged at 16.9%.

Of course, this increases the amount of interest you end up paying, and ups the card company's profits.

What can I do about it?

A couple of card providers operate far more honourable 'positive payment hierarchy' repayment policies - under which your most expensive debts are cleared first. Nationwide and Saga are both in this category, so consider applying for a credit card with one of them.

Alternatively, choose a card with a 0% purchase period that lasts as long as its 0% balance transfer period. This means that neither debt is more expensive than the other.

A good example is the Halifax All in One MasterCard, with both periods lasting nine months.

Cash withdrawal charges

One of the worst things you can do with your credit card is use it to withdraw cash. You'll be hit with a barrage of fees and charges that will make your eyes water.

First of all, credit card cash withdrawals are charged at an astronomical rate of interest - usually 20-30% APR. And unlike other credit card transactions (on which you're given an interest-free period of around 55 days) this interest will start racking up the minute that cash is in your hand.

Second, you'll be charged a cash withdrawal fee of up to 3% of the amount withdrawn, with a minimum charge of £2-£3.

And finally, of course, negative payment hierarchy means that your cash withdrawal will probably end up at the back of your repayment queue, with the interest ticking up all the time.

That's a heck of an expensive way to get your hands on a tenner!

What can I do about it?

Simple - never EVER use your credit card to withdraw cash!

Minimum payment misery

In recent years, many credit card companies have lowered the minimum monthly repayments (MMRs) necessary on their cards. These days, the MMRs of many popular cards are just 2% of the total amount owed.

Card providers usually lower MMRs without explaining to customers what this means for their debts. In fact, the implication is that they're making life easier for you, as you have to find less in repayments each month.

Don't be taken in! The lower your monthly repayments, the longer you will be in debt, and the more the card company will pocket in interest.

In The dangers of minimum monthly repayments, Szu Ping Chan recently showed how only making the minimum payment on a £2,500 credit card debt could mean it takes 50 years to pay off - and costs you over £10,000.

What can I do about it?

Ignore the MMR level your card company offers you and set up a monthly standing order to ensure you're paying back as much as you can possibly afford.

Little carrot, BIG STICK

A credit card company may act like your new best friend when they want your business, but don't be under any illusions: Slip up with your repayments and you'll be hit with a raft of disproportionately harsh punishments.

Let's say you've been accepted for a 0% balance transfer deal. If you're late with a single payment, you'll probably be charged a penalty fine - typically £12. Fair enough, some might say.

What's much worse is that your 0% deal may well be whipped away from you too, and you'll be left with a large credit card balance which is suddenly being charged interest at a rate of 16% APR or even more. That's a big smack on the wrist for a single unfortunate oversight.

What can I do about it?

As soon as you're accepted for a credit card, set up a direct debit for at least the minimum monthly repayment - more if you can possibly afford it.

Don't put it off until tomorrow or next week! You're likely to forget, and that's exactly how so many people get caught out.

Good luck!

More: The lovemoney.com charter for credit card justice | Avoid this sneaky rip-off charge