Win the war on plastic in your pocket

YOUR CREDIT CARD IS YOUR FLEXIBLE FRIEND, BUT MAKE THESE INTO MISTAKES AND IT COULD TURN YOUR DEADLIEST ENEMY

CREDIT cards are wonderful things if handled correctly, but they can also be a dangerous weapon in the wrong hands.

Packing some plastic allows you to spend cheaply and easily in millions of shops, restaurants and bars worldwide, as well as online, and you even get consumer protection as well.

Yet credit cards can also be a fast-track to debt and misery if you misuse them. So don’t shoot yourself in the foot.

Here are 10 ways your credit card could turn from your best friend to your worst enemy.

1

Missing out on 56 days of free interest

A major benefit is that most credit cards grant you an interest-free period of up to 56 days from the date you buy something, known as a “grace period”. Most other forms of credit will charge you from day one.

However, you must handle this with care. That 56-day period only applies if you have cleared your balance from the previous month in full.

There’s another danger. If you fail to repay the debt in full at the end of the month, you will pay interest on every single penny you borrowed – backdated to day one.

So if you borrow £100 but only pay back £50, you will pay interest on the full £100, from the date of purchase.

Myron Jobson, personal finance campaigner at Interactive Investor, says many people are not aware of the danger and pay interest without realising it.

“The only way to guarantee you will never pay a single penny in interest is to clear your bill in full on the required date every month.”

■ Tip: If in danger of failing to repay in full, cut other spending and put the cash towards your credit card.

2

Only making the minimum payment

One of the most common – and costly – mistakes cardholders make is to only make the minimum payment every month.

While you will avoid penalty charges by doing this, it will take you forever to pay off the debt and you will rack up loads of interest along the way.

Say you owe £2,000 on a credit card charging 22.9% a year, and the minimum payment is either 5% of your balance or £10 a month.

If you only pay the minimum, it will take an incredible seven years and nine months to clear your debt. During that time you will pay £978 in interest.

If the minimum is just 3% or £5, the £2,000 debt will take 19 years and 10 months to clear, and you will pay a thumping £2,493 in interest.

That’s more than you borrowed in the first place.

If you keep spending money on the card for new purchases at the same time, clearing the debt will take even longer – if you ever do clear it.

Richard Lynch, managing director at suitsmecard.com, says: “By making the minimum repayment you are mostly paying off the interest, not the actual money you owe.”

■ Tip: If clearing a debt is a struggle, consider switching it to a balance transfer credit card with an interest-free period.

3

Missing a payment

If you fail to make your monthly payment on time you will not only have to pay your lender’s full APR on your balance, but a penalty charge, too, typically £12.

As if that wasn’t bad enough, a single late or missed payment will also show up on your credit report, Myron says.

“That will show up on your file when you apply for credit in future, such as another credit card or mortgage. This will make it harder or more expensive to get credit in future.”

And every missed payment will stay on your credit report for six years.

■ Tip: Ideally, set up a direct debit to clear your balance in full every month.

If that isn’t possible, at least set up a direct debit for the minimum payment, to avoid penalty charges and credit report damage.

4

Going over your credit card limit

Every cardholder is given a monthly credit limit – the maximum amount they can spend on the card in total.

This is typically set at £1,200 for new applicants, although those with previous credit problems may be given £500 or less. The better off can borrow much more.

Myron says if you exceed your credit limit, even accidentally, you face an automatic £12 penalty charge, and your lender may hike your APR to boot.

“It could also decline purchases and your credit score will also take a beating.”

Beware going too close to your credit limit, as it is all too easy to slip over accidentally.

“It may also indicate that you have financial difficulties, which may affect future credit applications,” he adds. ■ Tip: Make sure you know the credit limit on every card you have, and never go near it. Ideally, do not spend more than 30% of your limit.

5

Failing to check your account

Fraudsters would love to get hold of your card, and go on a spending spree at your expense. So check your online or paper statements closely for unexpected purchases or cash advances, says Serena Pearson, communications representative at thinkmoney.co.uk.

“If you spot anything strange, contact your card provider immediately,” she says.

■ Tip: Consider checking your credit score with reference agencies Equifax, Experian or TransUnion, to see if ID fraudsters are applying for credit in your name.

6

Carried away with a balance transfer card

In a bid to win new customers, loads of credit cards charge zero interest for an introductory period that can last more than two years. Balance transfer cards can help you consolidate your existing balances on to a single interest-free credit card.

For example, the Sainsbury’s 30 Month Balance Transfer Credit Card charges zero interest for a promotional period lasting 30 months.

This is brilliant but a lot can go wrong. Typically, you will have to pay a fee of between 1.5% and 3% of the value of your balance, which will cost between £15 and £30 for each £1,000 you transfer. Although in most cases, this is worth the cost.

Another danger is that you use your balance transfer card for new purchases, Serena warns.

“If you spend without paying off the debt, you may start being charged at the usual rate of interest,” she says.

Alternatively, you could take out a card charging zero interest on new purchases. The M&S Credit Card’s promotional rate lasts for 22 months.

Or go for an all-rounder card that gives you both an interest-free balance transfer and a new purchases promotional rate.

Whichever type of card you choose, make sure you meet your monthly minimum repayments in the usual

‘‘

If you exceed your limit you face a £12 charge and lenders may hike your APR

way. Most important of all, clear your debt in full before the zerointerest period expires, otherwise you will suddenly find yourself paying an APR of 20% or more.

Tip: It is more important than ever to read the small print when taking out a promotional rate card.

Using your card abroad

Whipping out your MasterCard or Visa credit card while in a sun-soaked bar or cafe when on holiday is the simplest thing in the world, but it can also be costly.

Most credit cards slap on a non-sterling transaction fee of up to between 2.75% and 2.99%, costing up to £2.99 for every £100 you spend, says Andrew Hagger, cards and cash specialist at moneycomms.co.uk.

“This is charged on both purchases and cash withdrawals from an ATM when outside the UK,” he says.

Some credit cards have zero transaction fees when you are in

Europe, or even worldwide. Popular options include Halifax Clarity, while Barclaycard Rewards Visa is also highly rated.

Tip: Most banks and building societies offer travel credit cards with no overseas charges, so check what’s available if important to you.

Taking cash out on your credit card

Cash withdrawals on a debit card are usually free, but that’s not the case with a credit card. You will be charged interest from day one, without the usual 56 days of interestfree borrowing. Worse, you are likely to pay a withdrawal fee of around 3%, even if you are in the UK.

As if that wasn’t enough, you are likely to be charged interest at a higher rate than you are for purchases, Andrew says.

“The same goes for gambling and purchasing foreign currency with your credit card, which are also treated as cash transactions,” he adds.

Even if you pay your balance off in full you will still be charged interest on cash transactions.

And your cash withdrawal will also show up on your credit record.

Multiple cash withdrawals may worry some lenders if you apply for more credit, as it may suggest you don’t have enough money in your bank account.

Tip: Don’t withdraw cash on your credit card if you can avoid it – and you should certainly avoid making a habit of it.

Ignoring the automatic interest rate hikes

Some lenders, including Halifax and MBNA, link your interest rate to movements in bank base rate, Andrew says.

“So if the Bank of England increases rates, which could happen tomorrow, your interest rate will automatically go up by the same amount,” he warns.

Check what your card does and if the APR is too high, shop around for something cheaper.

When you are being charged an APR of more than 20%, you don’t want it to increase more, Sarah Coles, personal finance analyst at Hargreaves Lansdown, says.

And lenders don’t have to wait for base rate to actually rise.

“They also reserve the right to increase your interest rate for other reasons, say, if it costs them more to provide lending to you,” she says.

Tip: Check your APR and switch to a low-interest credit card. Tesco, Lloyds, NatWest and others have cards with APRs of 9.9%.

Unexpected money transfer fees

A 0% money transfer credit card lets you pay cash straight into your bank account. You won’t pay any interest during the balance transfer period, although you do need to make at least the minimum repayment.

While it can help your bank account cashflow, you need to watch out for the money transfer fee, Andrew says.

“This is typically around 3% of the amount you switch. So that’s £3 for every £100.”

Tip: When the 0% introductory period ends you will start paying interest. So aim to clear the card before then.