Even attractive low rate credit cards can prove a fast track to financial disaster, thanks to a host of sneaky fees imposed by the banks.
Most of you are already aware of the eye-watering interest rates on credit cards (the average APR is now 17.35%) and are using the various 0% balance transfer and new purchase deals to pay off your debt more cheaply.
But of course lenders don’t offer these deals out of the goodness of their hearts – they want to make money off of you. As they can’t achieve this through the headline rate, they simply bury a host of charges in the fine print in the hopes of catching you out.
Here are the five most common tricks to look out for.
#1: Balance transfer fee
The vast majority of balance transfer credit cards now come with an “admin fee”. Basically, this is how the lenders ensure they make at least some profit off of each customer, even if they clear their debt entirely within the introductory window.
These fees are usually in the region of 3%, which doesn’t sound particularly high, but it can prove quite hefty if you plan to pay off your debt over a short period.
Consider the following scenario: You have £1,000 debt that will take you four months to clear, so you take out a bog standard 0% for 12 months balance transfer card and pay a 3%, or £30, fee. Had you simply left the money on your credit card with an APR of 14.9%, you would have paid £31 in interest over the same period. So even though you switched to a “0%” card, the bank is still making a handsome profit off of you.
The lesson here is that anyone with a small debt that can be cleared quickly should opt for one of the few short term, fee free balance transfer deals out there, such as the Abbey Zero credit card (0% / 6 months) or the Britannia Building Society Classic card (0% / 5 months).
For larger debt that will take longer to clear, the fee becomes less important and it’s the length of the 0% offer that matters most. Let’s assume you have £4,000 debt that you plan to pay off over 15 months. Switch it to the Virgin credit card, with a 2.98% fee, and you will pay £119.20 on top of your original debt.
Leave it languishing on your current credit card with a 14.9% APR and you will accrue £408 in interest over that period.
#2: Kiss your new rate goodbye
This next trap can be really expensive. Once you have applied for your card and your account has been opened you must do two things. The first is to set up a direct debit for at least the minimum payment (preferably more). The second is to check with the card company that your new direct debit will be set up and operational in time to make your first payment.
If you miss your first payment you will now be charged at least £12. But you may well also have your introductory rate withdrawn - without being informed. If this happens complain vociferously but politely. If they won’t refund the fee and put you back on the 0% rate then transfer away immediately.
If you fall for this trick the card company gets the balance transfer fee which could be £150 or more, the late payment fee of £12 and the full rate of interest on your debt for a month or two which could be £140 (on £5,000 at 16.9%). Make sure you ask the question, "Will my direct debit cover my first payment?" If the answer is no then ensure you make your first payment manually.
#3: Inverse order of payments
This is undoubtedly the sneakiest of all the tricks employed by lenders as it catches so many people out (with disastrous consequences).
What they do is manipulate your debt so that the most expensive part is paid off last. Since the advent of 0% credit cards, this has become a massive money spinner for the banks.
As a result, there are a host of credit cards out there - from all the big name players, with the notable exception of Nationwide - designed specifically with this trick in mind.
They offer a lengthy 0% balance transfer deal and combine this with a short term new purchase offer designed to tempt you into spending on the card as well. Do this and you’ll be sorry.
Let’s assume you switch £3,000 debt to a credit card that offers 12 months interest free on transfers and three months on new purchases. You then have an unexpected £1,000 expense which you can’t immediately cover, so you put it on the card and plan to repay it before the 0% new purchase offer expires in three months time.
But when you do repay that money, you’ll find that it has gone towards the balance transfer instead. So after three months you still owe the £1,000 from that new purchase, and it is now earning interest at a rate of anywhere between 16% and 19%. Before you can even begin to repay it, you have to clear the £2,000 remaining on your balance transfer.
There are two ways to avoid this trick: Either choose a card that offers identical new purchase and balance transfer deals, or simply use a separate credit card for each. Personally, we’d recommend the latter, as it’ll get you a better deal – the longest dual interest free offer is 10 months, but you can get 12 months on new purchases with HSBC, and 15 months on transfers with Virgin.
#4: Foreign transaction/withdrawal fees
Use your credit card while abroad and you will be charged a 2.75% fee on every transaction. The foreign transaction fee is a big earner for banks, netting them £650 million last year alone.
As if having to pay nearly £30 on every £1,000 wasn’t enough, you’ll be hit with an additional fee of up to 3% for drawing cash. That means you could be charged up to 5.75%% every time you visit the ATM while abroad.
So how do you avoid these fees? Get an Abbey Zero credit card, which allows free use abroad and free withdrawals.
#5: Cash advance trick
Even if you aren’t charged for cash withdrawals on your credit card, it’s something you should avoid at all costs.
This is because these transactions earn interest at an obscenely high rate – as much as 25% with some banks - and of course it’s also the hardest debt to clear, because of the inverse order of payments we mentioned earlier.
If you really have no alternative, then make sure you get a credit card that won’t penalise you excessively for doing so. The CoOperative Bank’s Clear VISA is one of the few on the market that charges the same rate (12.9%) on withdrawals as for all other transactions.
