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By Russell Cavanagh Staff Writer
Monday, 18 August 2008 |
COMPARE credit cards carefully before choosing which one you want to sign up to. Almost all cards push their most appealing features but hidden traps will require especially careful navigation.
Here is a list of seven common credit card pitfalls.
We also provide recommendations on cards that can suitably help steer clear of particular types of trouble.
Credit Cards Sin #1: Unreasonable APR
APR stands for “annual percentage rate” and describes the true cost of money borrowed on your credit card.
As a rule of thumb, credit cards at the moment currently charge an average of 16% - so keep this figure to bear in mind when you compare credit cards.
If you need a card to make purchases but know you can reliably clear the balance fully each month, APR may not matter quite so much as interest should not apply.
However, if you can’t repay fully within contractual time limits, you will soon face debt spiralling out of control on higher-rate cards especially, so choosing a credit card with a favourable APR is essential.
Typically, cards advertised as suitable for people with poor credit ratings carry higher APR.
Rates usually hover above 30% and may go much higher. These cards can be handy for repairing credit ratings if used very sparingly on small purchases settled in full each month.
This strategy builds a record of good repayments that can give access to mainstream cards with lower APRs after about a year. But you need to be very careful and patient.
Watch out for “introductory” interest rates. They will increase after a period of time. What at first seems a cheap deal can become an expensive nightmare requiring you to borrow elsewhere to stop the balance ballooning further out of control.
Some cards offer 0% repayment periods of up to two months before interest applies. Use this site to compare credit cards offering introductory deals but bear in mind potential future costs too. Stay sensible.
It pays to take time to compare credit cards carefully. Why just accept the first card you’re offered when there are others to choose from?
HSBC credit card, Capital One Platinum and Natwest Classic offer 0% for an initial period on purchases.
Credit cards such as the Barclaycard Simplicity carry lower interest in the longer-term.
Credit Cards Sin #2: Interest Traps
What gets paid off first?
Credit card companies are there to make money from you and one of the sneakiest ruses they have in their bag of tricks is the interest trap created by their so-called ‘allocation of payments’ clause.
You should always check the small print to see how repayments are allocated towards paying off the balance.
Credit card companies will often structure repayments in a way that reduces the cheapest debts (ie. the ones with the lowest interest rates) on your card first, leaving the more expensive ones to gather further interest.
The cheaper debts typically include 0% balance transfers whilst fees and interest on purchases or cash withdrawals are almost certainly the most expensive (and therefore credited last).
When is interest charged?
The majority of cards now charge interest on a daily basis, so make sure the card you choose offers this.
Daily interest works out significantly cheaper than interest applied weekly or monthly.
Do check small print and take time to compare credit card conditions stated in information accompanying application forms. You may have your card for a long time so there’s no need to rush into an agreement without first giving it full consideration.
Capital One Platinum Card is offering 0% both on balance transfers and purchases until 1st September 2009. This card does, however, demand an exemplary credit rating.
The Halifax All in One Mastercard similarly offers 0% but only until April 2009.
Both cards offer a good, initial solution to the problem of interest traps.
Credit Cards Sin #3: Prestige Cards
Some cards are referred to as being “Gold” or “Platinum” status.
They typically offer a higher credit limit than standard credit cards as well as 0% or specially-reduced interest rates on balance transfers for substantial periods.
Additionally they may bring with them perks like free additional copies of statements and access to special deals (e.g., cashback, discounts on specific products and services, “air-miles,” etc).
Prestige cards do offer better deals to those of us who can access and service them, but your credit rating will almost certainly need to be pristine.
Platinum and Gold cards turn down a lot of applicants, a process which could see a small black mark added to your credit history.
As such, you should avoid applying for a Gold or Platinum credit card – indeed avoid even taking the time to compare Gold credit cards or compare Platinum credit cards – if you think you may get turned down.
Ideally, a creditor refusing Platinum or Gold card applications will offer something more within reach - perhaps from their “classic” range. Compare credit cards on this site to see what’s currently available.
RBS, Barclaycard and MBNA are known for offering Platinum cards to people with less than spotless credit histories.
Barclaycard, American Express and Natwest offer the best Platinum deals if you can get them.
Natwest and RBS promote the best Gold credit card deals.
Credit Cards Sin #4: Using cards abroad
What better way to avoid carrying large sums of cash abroad than by taking your credit card?
Good news on credit cards is that many purchasing safeguards under UK law also apply to purchases made overseas. Great!
However, pitfalls exist here too.
Most cards charge an extra foreign currency loading fee on purchases overseas and rates are typically up to 3%.
But not all do. Post Office Platinum doesn’t charge this particular fee so may be prove your best bet if you have itchy feet and seek more exotic destinations on a regular basis.
Credit Cards Sin #5: Cards that tempt you to spend
The worst examples of cards that tempt spending-sprees are store cards.
These cards trade on loyalty to a particular store and are usually very easy to obtain. They typically carry an APR% figure that’s above ordinary credit card rates by as much as half again.
Store cards are best avoided – better to step back out of the shop and compare credit card deals elsewhere first. You can usually use most credit cards in your favourite shop anyway.
Steer clear too of credit cards that offer incredibly long balance transfer deals alongside a shorter, but equally tempting interest free purchase rate.
These cards are aiming to get you to transfer a balance and then go wild at the mall.
Not surprisingly however, they always use the interest trap described above, requiring you to pay off your balance transfer first before your purchases can be paid off.
The only exception to this rule is the handful of credit cards that offer 0% on balance transfers and 0% on purchases for the same amount of time, such as the Capital One Platinum credit card and the Halifax All in One credit card.
Credit Cards Sin #6: Expensive cash withdrawals
It’s best to avoid using credit cards for cash withdrawals. This is a constant, golden truth never to forget.
Apart from transaction fees set at around 2.5% to 3% each time, applicable interest is usually at least 25% to 30%.
What’s more, interest will be charged from the day you make the transaction, and you will normally have to have paid off all other debt on the card before your payments can start hitting the cash withdrawals you made.
No other way to get hard cash quickly when you need it? If you compare credit cards with cash withdrawals in mind, you’ll find the best deals available include the Co-op Bank Platinum Card that carries 9.9% interest with a 2.5% fee. This is closely followed by the Shelter Credit Card that comes in at 12.9% but, significantly, attracts no withdrawal fee.
The Co-op Bank also has a Think credit card with 18% and 2.5% charged.
Credit Cards Sin #7: Lousy Rewards
Air-miles usually attract the most criticism as being lousy gifts attached to financial products.
Apart from having to spend loads of money to buy any meaningful distance, booking fees on transactions involving air-miles can easily reduce or negate any benefit. Quite often too, it is only more expensive airlines that accept these deals.
Otherwise, lenders’ arrangements with burger chains, discounted meal deals at select hotels, presale tickets to pop concerts, entries to prize draws, etc, etc, are only perks at best.
They will either be lousy or attractive depending on your own tastes. But they are merely perks and as such surely form no basis on which to make a decision best suited to your needs and circumstances.
A valid consideration for some consumers may be cards offering ethical donations to charity based on purchasing. If this appeals, Barclaycard’s Breathe and Coop Bank’s “think” products both have the environment very much in mind. At 14.9% and 12.9% APR respectively, they make great sense if you want to do good as you spend on your card.
Sound like you? Choosemoney has a “Reward” section packed with different cards offering all sorts of goodies.
We aim to help you make an informed decision on any of points raised in this article. Finding the right product demands care. Don’t sign up on impulse. Take time to compare credit card deals using this site. It will be worth it in the longer term and you really should find a card that suits you.
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