Credit card traps you have to avoid

October 21, 2006

The retail stores are already playing their Christmas jingles and although everywhere isn't decked in holly just yet, Christmas is coming and those of us embarking on a gift buying spree will have to get their finances in order.

Earlier this month I explained how you could make your money stretch that little further by playing the banks and credit card companies at their own game, Be smart with your credit cards this Christmas. Using credit cards that offer 0% introductory offers and others that offer cash back and rewards on everything you spend are the smart choice, however, for many of us these deals on offer are not available to us so we have to make do with what we have.

Although you may not be able to take advantage of any new credit card deals there are other ways you can save money on your credit card this Christmas.

Avoid minimum monthly payments

Credit cards are not cheap by any means and with the average APR around 16 per cent, a credit card is one of the most expensive lines of credit available in the UK market. Banks and credit card companies know this so they offer the cardholder a very low minimum payment requirement of around 2-3 per cent. What this means is that any cardholder who keeps to the required minimum payment will end up paying hundreds if not thousands in interest that could easily have been avoided. Take a look at our minimum payment calculator and see for yourself how much minimum payments can cost.

By taking a credit card balance of £3,000 and keeping to a minimum payment of 2% the total interest paid would be £5,251.74 (standard APR of 15.9%) and would also take over 36 years to repay! If you could afford an extra £10 each month the interest payable drops to £2,716.56 and the repayment term is now just over 13 years.

Payment Protection Insurance

If you currently have payment protection insurance (PPI) supplied by your credit card company cancel it right now! Just this week the Office of Fair Trading (OFT) has slated the PPI market calling it uncompetitive. The report published by the OFT found that PPI schemes supplied by credit card companies cost more than ones that could be purchased independently. Furthermore it was found that claims on PPI policies were significantly lower than other insurance policies.

Order of repayments

This is another nasty method that credit card companies use to get more of your cash. Let's say you have transferred a balance of £1000 to a new credit card that offers an introductory 0% deal on all balance transfers, now if you happen to use that same credit card for any additional purchases, for example £200, then the next month you send payment of £200 to your credit card company to pay for your earlier purchase, you don't pay interest, correct? Unfortunately this is not the case and this is why it is always important to read your credit cards summary box. Most credit card companies take your payments and pay off the cheapest debts first. So in this example they would take the £200 and put it towards the £1000 that was transferred to the card. The £200 you spent would attract the cards standard APR which on average will be around 16 per cent.

So never ever use a credit card that has a balance transferred to it for purchases. If you need to use your credit card to buy anything use a different one.

Default charges

Earlier this year banks and credit card companies were forced to reduce their default charges to a maximum of £12 per transaction. Even the £12 figure is excessive, however, more can be done to make sure you do not fall into this trap. try not using your credit card for small purchases, instead use cash, this way you can keep in control of what you spend. Those everyday items can soon add up and catch you unawares at the end of the month. Also, consider setting up a direct payment facility to make sure you avoid any late penalty fees.