Card providers might win you over with special offers of eye-catching interest rates but be warned: they have a few tricks up their sleeve to sting spenders. Here are 10 tricks to be aware of.
1. The everlasting debt
If you make the minimum repayment demanded by your lender every month, your credit card debt could take years to pay off. This means that, if you’re only paying the minimum, the debt could live on unless you start overpaying.
With some cards, the debt even grows. For example, with a 1 per cent minimum repayment, you could pay off £10 on a £1,000 debt, but interest is charged at £10, leaving your debt to stagnate.
2. Which came first...
...the 0 per cent purchase or the 0 per cent balance transfer?
Despite industry-wide improvements in January on the order we repay different card debts, there is still a trap to be aware of. When you have two 0 per cent deals running simultaneously, card providers will not necessarily pay off the shortest deal first. When your short 0 per cent on purchases deal expires, you might find that the whole purchase is still on the card, so it now costs you interest.
3. How a 3 per cent fee costs 11 per cent a year
A 3 per cent fee is standard on balance transfer cards, and in return you pay no interest. On a £5,000 transfer, a 3 per cent fee costs £150.
So, if you have a normal card with no transfer deal and no fee that charges 10 per cent APR, this means you pay 0.8 per cent per month. Hence, if you pay off your balance in equal instalments you'll pay £42.50 in interest in the first month, £35.57 interest in the second (because your debt is smaller), £28.57 in the third month, and it adds up to £150. So you have paid the same as if you used the fee.
However, you can reduce the cost and make balance transfer cards more useful by choosing cards with lower fees.
4. Hole in wall leads to hole in wallet
The interest charged for withdrawing cash with a credit card is horrendously high – typically approaching 30 per cent. You are charged from day one, with no interest-free days and you usually have to pay an up-front fee on top.
5. Gift cards
The German word for poison is “Gift” and that's exactly what some card providers feed you when you buy gift cards using a credit card, since they can be classified as cash withdrawals – see point four. The same goes for gift vouchers, banks such as RBS/NatWest have been known to use this trick so check before you buy them on a credit card.
6. Are you getting the headline rate?
Those of us fortunate enough to be accepted for a card and get the representative APR still pay around 20 per cent, on average. That’s because the average APR after a headline rate expires is around 20 per cent. This will cost you about £1,000 in interest if you pay off a £5,000 debt in equal instalments over two years.
7. Costly extras
Often cards are sold with a variety of insurances to protect repayments, or to protect you against fraud or theft. These are usually vastly over-priced, especially since we already have excellent protection against card fraud under existing laws.
8. Pay the price for doing no wrong
Your reward for managing to avoid debt could be a penalty, because with some cards, if you fail to use them in a year, you will be charged a fee. Providers look for extra income where they can, with some even charging an admin fee if you change address.
9. Playing for time
In a trick very much like chase the ace, some lenders shuffle around your statement and payment dates, often with just a small warning at the bottom of your previous statement. You could miss this fast shuffle in the blink of an eye, but it gives you less time to pay. Miss it and you will be fined.
10. Losing your home from card debt
It is easy to turn unsecured debts, such as credit cards, into secured ones. If you go into arrears and do not make arrangements with your lender, the lender can get a court order securing the debt against your home. So long as they follow the right procedures, the judge cannot refuse. When you sell your home, your card provider will get its share, with interest.
The card provider could go further and try for a second court order that forces the sale of your home. This is much harder to get, but if you have large card debts and you are in arrears on other debts, it can happen.