Credit cards
are a great idea: they let us spend money we haven’t yet earned, and we don’t have to pay a penny for the privilege.
Well that’s the theory, anyway. If you are disciplined enough always to pay back whatever you’ve borrowed the following month, you’ll never have to pay any interest or penalty charges.
Unfortunately, many of us can’t afford to clear our bills in full every time so the interest costs can start to build up.
But most people understand that this is how cards work, and accept they might sometimes have to pay extra for the right to borrow.
What is unfair, however, are the sneaky charges and conditions hidden in the small print of many deals which help lenders boost their profits at our expense.
Here is a rundown of the biggest credit-card rip-offs, and how you can avoid them.
Cash withdrawals
Taking money out of a cash machine with your credit card is a big mistake. Normal borrowing rules – ie, if you pay back the money next month, there’s no interest charged – do not apply to what lenders call “cash advances”.
Instead, you’ll be charged interest from the moment you take out the money – possibly at a higher rate than usual – and you could face a withdrawal fee as well. Just don’t do it.
Credit-card cheques
For years, providers sent unsolicited credit-card chequebooks to customers in a bid to extract more profit from them. Like cash withdrawals, money spent on cheques is subject to higher interest charges, and does not benefit from the interest-free period of normal spending.
Companies are now banned from sending out cheques without them being requested – although it’s hard to understand why anyone would ask to be ripped off like this.
Some lenders have abandoned cheques altogether.
If you have any lying around, best to put them through the shredder.
Gambling
Many lenders consider money spent on betting websites with credit cards to be the same as taking cash out of an ATM: this means a fee per every bet placed (say 3 per cent of the stake) as well as extra interest charges and no interest-free period.
Use a debit card instead.
Spending on balance transfer card
One of the most cunning tricks up lenders’ sleeves is the way they treat your repayments if you’ve moved debts to take advantage of a 0 per cent interest deal.
Let’s say you’ve switched £5,000 from card A to card B, which is offering 0 per cent on transfers.
Then you start spending with card B – although it charges 15 per cent a year on new spending.
What happens with the majority of providers at the moment is that any repayments you make only go towards paying off your interest-free £5,000 debt.
That means your spending keeps on accruing interest at 15 per cent, without any of it being paid off.
Most people in this situation would prefer their repayments to clear their new spending first – but that is not an option.
So if you sign up for a low-interest balance transfer card, you shouldn’t use it for new spending.
There is good news though: from next year, providers will no longer be able to use this trick. And there are a handful of lenders which already let customers clear their most expensive debts first – these include Nationwide and Saga, with a handful of other firms including The AA and Virgin Money due to follow suit next month.
Don’t forget your direct debit
If you don’t pay anything towards clearing your debt in a given month, you’ll get hit with a penalty charge – as well as facing a build-up of interest charges.
Worse still, if you’ve moved a chunk of debt on to an interest-free balance transfer card, missing a minimum payment could mean you have to start paying interest at the full rate.
A lot of providers have a clause in their terms and conditions which states that customers who miss monthly repayments lose their right to 0 per cent interest.
As soon as you sign up for a new card, make sure you set up a direct debit from your bank account that ensures you make at least the minimum repayment every month.
