Avoid credit card pitfalls
MoneySupermarket has conducted analysis into a range of costly credit card ‘pitfalls' to help people avoid paying over the odds on fees and transactions when using their ‘flexible friends'.
Credit cards are an important part of the nation's finances and two-thirds of credit cards held by UK consumers currently bear interest. Falling foul of the terms and conditions of a credit agreement can lead to mounting penalty fees and have a negative impact on personal credit reports.
Late/ missing payments
Consumers should avoid missing payments or making late payments on their credit card balances. This would result in additional charges and in some cases the loss of any promotional rates (i.e. 0% on purchases). Not managing your payments properly can leave a black mark on your credit score. For example, a credit card user missing a first payment on a 12 month, 0 per cent purchase credit card deal could be charged an additional £206 in interest over the 12 months if the promotion was removed and they defaulted to an average rate of 17.31 per cent.
Earlier this year, MoneySupermarket found over one in six (17 per cent or 8 million Brits) missed a payment for at least one bill in the last 12 months. Credit cards came out on top as the most missed payment; three million people had not paid their credit card bill in time over the last year (7 per cent).
Paying only the minimum amount
While many people pay off more than the minimum each month, MoneySupermarket calculated that someone with a balance of £1,500 on a card with an average APR of 17.31 per cent, making only the minimum repayment of 2.5 per cent each month could take 19 years and 3 months to clear their debt. To add insult to injury, they would also end up forking out an extra £1,590 in interest payments in the process. For someone struggling to make monthly repayments, a leading Balance Transfer card such as Barclaycard Platinum with Balance Transfer offers zero per cent for 22 months.
A cash advance, in most cases, is charged at a much higher rate of interest than standard purchases on the card, with the interest also accruing from the date of the transaction. For example, consumers on an average APR of 17.31 per cent withdrawing £500 in cash will find themselves being charged 26.72 per cent, which is 9.41 per cent higher than the standard average of 17.31 per cent and costs £3.25 more.
As well as the traditional ATM withdrawals, all of the UK's major credit card providers treat any form of gambling activity on a credit card as a cash advance. As a result, anyone using a credit card to gamble may face higher APRs for transactions. Additionally, overseas money transfers or a travel money purchase made on a credit card is charged in the same way as a cash withdrawal, meaning holidaymakers could be paying a much higher rate on their holiday spending money.
Kevin Mountford, head of banking at MoneySupermarket.com said: "A worrying amount of people may be paying well over the odds on their credit card repayments simply due to poor credit card practice. Missing or making a late payment is a costly move and could also have a knock-on effect for future credit applications whether it is for other credit cards or loans; including mortgages. Setting up a direct debit is one of the best ways to prevent this, although, paying only the minimum amount each month could end up costing a great deal more. Moving to a zero per cent balance transfer card is one solution to stop overpaying in interest each month as you pay your balance down.
"As with any financial product, credit card holders must ensure they understand the terms and conditions or they could pay more than they realise for certain types of transactions. Taking cash from an ATM on a credit card can be expensive, and it is important consumers are aware that any transaction which buys cash or the equivalent of cash, for example, foreign currency, will also be charged at a higher rate of interest and the transaction won't benefit from the interest free period you get on standard purchases. If you are planning to use a credit card abroad for cash withdrawals, remember you may also be charged other fees as well, so what seems like a convenient way of getting cash could prove to be costly."
MoneySupermarket has a SmartSearch credit profiling tool to help those looking for the best credit card deals for their circumstances. The tool matches the customer's credit profile against the card they are most likely to be accepted for, but doesn't leave a footprint on their credit file.
Kevin Mountford continued: "For those who have a poor credit rating, there are a number of products designed to help consumers show they are able to use credit responsibly and improve their personal credit score. The new Capital One Classic credit builder card offers customers the kind of interest break typically reserved for those with the best credit scores. It offers zero per cent on purchases up until August 2012. However, because it is aimed at borrowers with a low credit score, the card comes with a high representative APR of 34.9% (variable). This compares to the average 17.31% according to Bank of England figures. The card is available exclusively via MoneySupermarket and is a good option for those who can make regular repayments in order to build up eligibility for a mainstream card offering."