Why your credit card is probably not as versatile as you
think
 Just
because a credit card is good for one thing, doesn’t mean it’s good
for everything. While your credit card may score an A for its low
rate on purchases, it’s probably hiding a fistful of bad grades
behind its back.
And it’s these bad grades that can cost you dearly.
“There is no one single golden card that does everything well,”
says Lyndsey Burton, Director of Choosemoney.co.uk.
“Most credit cards are one-trick ponies. They are great for one
thing, but flunky – and in some cases disgraceful - on others. Sadly,
there is often an almost deliberate attempt to trap you into paying
as much interest as possible.”
We’ve identified 3 of the ‘traps’ credit card companies use to
make money from those who use their credit card as an ‘all rounder’:
- The ‘Allocation of Payments’ Trap
- The ‘Cash Advance’ Trap
- The ‘Use Abroad’ Trap
The 'Allocation of Payments' Trap
What is the ‘Allocation of Payments’ trap?
The allocation of payments trap is a small print condition that
doesn’t allow you to pay off certain things (normally the high APR
stuff) before you have paid off others (normally the low APR stuff).
So your higher rate debts (purchases, cash advances etc.) land up
trapped behind your lower rate debts (transferred balances at 0%,
purchases at introductory rates etc.) until the lower rate debts
have been paid off in full.
And if your lower rate debt happens to be a balance transfer from
another card that you’re planning to pay off over a year, it’s a
long time for the higher rate debts to remain unpaid!
All credit cards have an ‘allocation of payments’ clause in their
terms and conditions, which sets the order in which payments made
to the account will be applied. This order states that items listed
first must be fully repaid before you can begin to repay the items
listed later.
Lyndsey Burton, director of personal finance website ChooseMoney.co.uk
warns:
“The allocation of payments quickly becomes a minefield for anyone
highly advertised (and hugely popular) credit card 0% deals – namely,
because you’ve now got a very cheap and often large debt on your
credit card. You have to use these cards very carefully.”
Offers to watch out for (and how they trap you)
Here are some examples of offers that could potentially see you
fall into the ‘allocation of payments trap’.
-
0% balance transfer for 12 months and 0% purchases for 3 months.
How the trap works:
The card entices you to transfer your current card balances to
a 0% interest rate lasting for 12 months.
This balance transfer usage alone is fine – and in fact it’s
money saving! But here’s where the trap comes in: the card also
entices you to spend on it by offering you 0% rates on your
purchases too, for an ample 3 months.
Sounds tempting? Unfortunately it’s not… What they don’t advertise
is that you won’t be able to repay any purchases you’ve made
while you’re also enjoying your 0% balance transfer deal. So
anything bought on the card, from the third month onwards, will
accrue interest charges and remain unpaid – effectively ‘trapped’
- until you have first repaid your balance transfer in full.
Card companies may also offer enticing rewards to get you spending
on your 0% balance transfer card. The worst culprits here are
AOL credit card (by MBNA), the SonyCard credit card (by MBNA)
and all the MBNA football premiership cards.
How to avoid the trap:
Lyndsey Burton, director of personal finance website ChooseMoney.co.uk
suggests:
“It’s all about how you use these cards. They are superb for
their lengthy 0% balance transfer deals OR for spending on to
enjoy the 0% introductory purchase period and various rewards
on offer.
"However, steer clear of using these cards for both transferring
to and spending on during their 0% periods. Once the longest
0% period is up, the trap is removed as purchases and balances
transfers usually return to the same standard interest rate
– i.e. both balances are equal in cost.”
-
0% balance transfer for 12 months and non-promotional purchase
rate.
How the trap works:
The card entices you in with a 0% balance transfer deal, but doesn’t
warn you not to spend on the card.
The 0% balance transfer deal on its own is fine, and some cards
offer really good money saving deals, allowing you to actually
start repaying your credit card debts.
However, due to the allocation of payments rule, if you spend
using one of these cards your purchase transactions will effectively
become trapped behind your cheaper rate balance transfer – accruing
interest charges – until you’ve first repaid your balance transfer
in full.
How to avoid the trap:
Lyndsey Burton, director of personal finance website ChooseMoney.co.uk
suggests:
”If you have current outstanding credit card debts, balance
transferring can save you a heap of money and can help you get
back in control of your finances.
"These cards can and should be used for 0% balance transfers.
However, once your balance has been moved over, hide the card
at the back of a drawer and focus on repaying your debt. Never,
ever spend on it”
Offers that don’t use the trap
Fortunately, there are some cards that don’t use this trap:
-
0% on balance transfers and purchases for 9 months.
These cards are the only 0% cards that are suitable – allocation
of payments trap-free – to use for both transferring a balance
and purchase spending.
The reason is simple; they offer simultaneous 0% interest rate
deals on both balances transferred to the card and any purchases
spending for the same length of time – thus removing the possibility
of trapped spending debts.
Lyndsey Burton, director of personal finance website ChooseMoney.co.uk
warns:
”Be careful though, no 0% card is suitable for cash advances,
such as drawing cash from an ATM using your card, or getting
cash-back at the supermarket. This is because balances from
cash transactions will always become trapped behind the 0% debts
accruing rather hefty interest charges and remaining un-repayable
until your 0% debt is fully repaid.”
How to avoid the allocation of payments trap
• Check the introductory offer
Are the 0% deals the same length? Or does the purchase period end
before the balance transfer deal?
• Always read the small print
In particular, pay attention to the allocation of payment clause,
which reveals the order in which payments you make are credited to
your account balances.
• Hide it in a drawer
As a rule of thumb, if you’re making use of a 0% balance transfer
deal, hide the card away at the back of a drawer and use a more suitable
card for any purchases or cash advances you may need to make.
• Choose the right type of card
If you want a 0% deal for both a transferred balance and new purchases,
make sure you get a card that’s suitable to do so on, e.g. the card
offers a 0% rate on both balance transfers and purchases for the same
length of time!
• Use a good comparison website
Choose.net is the only credit card comparison site that reveals
which cards are suitable for balance transfers and purchase spending
(eg. See 0% balance transfer credit cards here)
The 'cash advance' trap
What is the ‘Cash Advance’ trap?
Credit cards do not advertise their cash advance rate, which is more
often than not considerably higher than the quoted APR (the rate charged
for purchases).
Cash advances also usually carry a handling fee too, and interest
is usually charged from the date of transaction – even if you repay
your balance in full each month.
Be aware of the allocation of payments clause too, which usually
orders payments from cheapest balance to dearest, with cash advances
generally being repaid last. This can hit you especially hard if
you’re enjoying any 0% balance transfers or purchases, where you
may not be repaying your debt quickly.
The 'use abroad' trap
What is the ‘Use Abroad’ trap?
Most credit cards charge a ‘loading’ fee if you use the card abroad
or for overseas Internet purchases.
This fee is often hidden in the small print behind a range of aliases,
including a ‘foreign loading fee’, a ‘foreign transaction fee’,
a ‘foreign commission fee’ or a ‘currency conversion charge’.
Most credit cards will charge a loading fee of 2.75% of the total
transaction amount.
Lyndsey Burton, director of personal finance website Choose.net
warns:
“If you use your credit card for withdrawing cash or buying foreign
currency, you can expect to be charged the foreign loading fee and
the cash handling fee alongside a usually costly cash advance interest
rate from the date of the transaction.”
How to avoid the ‘use abroad’ trap
• Find the right card
Make sure you have a credit card that’s cheap to use abroad. Look
for no foreign transaction fees and a low purchase interest rate.
• Use a debit card
Use your debit card if you can, though be aware most debit cards
now also charge a foreign loading fee. The Nationwide building society
famously offers fee-free transactions from any ATM around the world.
• Buy foreign currency or traveller’s cheques before you
go
The cheapest way to buy foreign currency or traveller’s cheques
in the U.K. is to withdraw the cash on your debit card from a free
ATM machine (usually a bank or building society ATM – not the ones
you might find in a shop or club) and then buy the foreign currency
or traveller’s cheques with the cash from a competitive bureau de
change, such as the Post Office.
 Parts
of this article appeared in the Daily Mirror's YourMoney section
in January 2007
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