It will pay to play your cards right as lockdown ends
HARVEY JONES EXPLAINS HOW TO STOP DEBT CREEPING UP AS BRITAIN OPENS FOR BUSINESS
WE’VE been spending less on credit cards during lockdown – but our resolve is now being tested as shops, pubs and restaurants open up again. During the February lockdown, people paid back consumer borrowing at the fastest rate in 27 years, according to the Bank of England, while credit card borrowing was down a fifth in a year.
So don’t let that hard work go to waste now.
Russell Winnard, director of programmes and services at charity Young Enterprise, says younger people must tread carefully as unemployment and financial insecurity grows.
“Try to maintain the self-control you had in lockdown and avoid impulse buying,” he says.
Used carefully, credit cards can be your best friend, but the relationship can quickly sour if you rack up debts you cannot repay.
Now of all times, it makes sense to play your cards right.
KNOW HOW THEY WORK
The big attraction of credit cards is that they allow you to spend money with nothing to repay for up to 55 days.
By contrast, if you spend money on a debit card, the cash is instantly taken from your bank account.
If you pay off your credit card bill in full each month, you pay no interest at all. The problems begin if you don’t.
Most credit cards charge hefty annual percentage rates (APRs) of 21.9% a year, and in some cases much more, so unpaid debt can quickly spiral out of control.
USE THEM FOR THE RIGHT THINGS
Credit cards can be a great way of making larger purchases, as you can spread the cost over several months. Before making a major purchase, Martin Magnone, chief executive of card issuer Tymit, suggests using an online interest calculator to see how long the money will take to repay.
“This will give you a clear idea of what you can afford,” he says. Avoid using credit cards for everyday spending, unless you clear the bill in full every month, or you risk living beyond your means. And do not use them to gamble online or withdraw cash – except in an emergency – as interest starts rolling up immediately, at punitive rates.
REPAY MORE THAN THE MINIMUM
Every month, you have to make a minimum repayment towards the debt on your credit card, for example, 3% of the debt, or a flat £10. If you miss that, you face an instant penalty of around £12, and will damage your credit record, too. Shahla Asif, a director at hospitality company Main Course Associates, says the golden rule of credit is to never miss a single minimum payment.
“Set up a monthly direct debit to make all your credit payments a week in advance of the due date just in case,” he advises.
If you simply make the minimum payment, it will take years to pay off your debt. In an ideal world, clear the whole lot every month. Make sure you know your credit limit and never exceed it, or again, you risk a typical £12 penalty plus credit record damage.
TACKLE DEBT NOW
If you have run up credit card debt that you are struggling to repay, don’t stick your head in the sand. It is too late to apply for a payment holiday, but talk to your provider if you are having serious problems to see what help it can offer. Richard Lynch, managing director of mobile banking app Suits Me, says if you have debts across several cards, target your firepower on the one charging the highest interest rate.
He says: “Pay the minimum on your other cards, too, to safeguard your credit record.”
TRY BALANCE TRANSFER CARDS
A good way to cut monthly costs is to switch your debt to a balancetransfer credit card. These charge zero interest for an introductory period of two years or more, putting you back in control.
Katie Brain, consumer banking expert at Defaqto, says make a note of when the introductory offer period expires and aim to clear the full balance by then. “Otherwise you could be in for a nasty shock when you revert to paying 21.9% or more,” she adds. Beware of using a balance transfer card for new purchases, as you may be charged interest right away. Some balance transfer cards charge zero interest on new purchases as well, giving you the best of both worlds.
SHOP AROUND FOR A DEAL
Many providers pulled their best introductory deals during the pandemic, but Steve Wiley, chief executive of comparison service Monva, says choice is growing again so shop around.
“The M&S Bank Transfer Plus Credit Card offers an interest-free period of 29 months, with a 2.75% transfer fee.”
This fee is charged on your balance, so if transferring £3,000, you will pay out £82.50.
Wiley also rates the Sainsbury’s Bank Balance Transfer Credit Card, which is interestfree for 29 months with a 3% or 4% fee, depending on your credit rating. This costs £90 or £120 on a £3,000 balance.
For those who want interest-free purchases as well, he recommends the Santander All in One Credit Card.
“This charges zero interest on balance transfers for 26 months and new purchases for 20 months. There is no transfer fee, but a £3 monthly charge.”
PLASTIC GIVES PROTECTION
Chris Lilly, at personal finance comparison site Finder.com, adds that spending on credit cards gives you extra protection compared to a debit card or bank transfer. Under Section 75 of the Consumer Credit Act, card providers are jointly liable for any breach of contract or misrepresentation by the retailer or trader, for items costing between £100 and £30,000. If items are faulty and your supplier refuses to help or goes bust, your credit card provider may step in.
“This gives you added reassurance, especially when buying online,” he says.
Section 75 protection applies to holidays and overseas purchases as well.
BEWARE STORE CARDS
As the shops open up, watch out for store card offers as APRs can top 30%.
Andrew Hagger, personal finance expert at MoneyComms, says the only time store cards make sense is if you are making a major purchase, as you can grab the 10% discount many retailers offer on your first spend. But he does offer a warning: “Repay the debt in full that month or interest charges soon wipe out discounts.”