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This week's newsletter talks you through some of the best ways for you to manage your credit card, and how to avoid some of the pitfalls that could end up costing you a small fortune.
Be prepared
My next door neighbour recently took out a credit card which offered 0% on balance transfers for the first 12 months. Whilst this initially looked like a smart move as he was switching from a card that was charging him almost 20% interest on his existing balance, things soon took a turn for the worse.
He forgot the date of his first repayment and by the time he had realised, he'd missed it by two days. This had disastrous consequences as not only did he have to pay a £12 penalty fee, but he also had the 0% interest rate cancelled as he had, in the words of the credit card company, defaulted on the terms of his agreement.
A sensible precaution even if you're not on a preferential interest rate, is to set up a direct debit so that the minimum monthly payment is made to your credit card each month. That way you'll never miss a repayment and won't be faced with having to fork out £12 for a penalty fee.
Another thing to remember if you're taking out a credit card with a 0% introductory offer is that you will need to transfer your existing balance within a set timescale (60 to 90 days) if you want to take advantage of the cheap interest rate that's up for grabs.
With introductory credit card offers costing the card provider a substantial sum to provide you with cheap or 'free' money, they will look for any chance they can to revoke the deal, so make sure you don't miss your payment or pay it after the due date otherwise you'll be faced with fees and high interest rates as a result.
Try to pay back more than the minimum each month
Over the last few years, credit card companies have reduced minimum repayment levels. These days, many will only ask you to repay 2% or 3% of the outstanding balance on your monthly statement. Whilst you might feel that this is a generous move by your card provider, the truth of the matter is that it makes them far more money in interest charges and it's at your expense.
To highlight just how much interest this approach could cost you, let's have a look at an example. If you have a credit card debt of say £2,500 at an interest rate of 18% and you repay the minimum balance of 2% each month, it will take you 43 years, YES 43 YEARS, to repay your debt and cost you an astronomical £6,459 in interest charges in the process.
You don't have to pay a great deal more to make a difference; in fact by simply paying an additional £25 on top of the minimum balance each month, you could repay the debt in just less than six years and save yourself £5,118 in interest into the bargain.
Check out the best deals before you sign up
Don't be fooled into taking out a credit card based upon the claims in a newspaper advert or on a glossy leaflet that drops through your letterbox. Check out the top deals from an independent source such as Moneynet.co.uk to find the right card for your circumstances.
Bank staff and shop assistants are under immense pressure to sell you Payment Protection Insurance and store cards, even though they may be mediocre products or worse.
These salespeople's work targets, bonuses and commission often depend on the amount of 'extras' they manage to tempt you into buying - so it's not surprising they'll tell you that they're right for you even though there are better deals to be had.
Don't rely on just one card to be 'jack of all trades'
Another important point is that you need to decide exactly what sort of credit card(s) will suit your purposes.
A low rate balance transfer credit card may offer you a fantastic deal to switch your balance; however it may prove to be very expensive if you use it for buying goods.
Similarly the best rewards card on the market may end up costing you a packet when using it overseas.
Whilst we would never encourage anyone to have a fist full of plastic, it makes financial sense to have two or three, on the basis that you use each particular card to its strength.
Ideally the combination of cards in your purse or wallet should, between them, give you the following options:
- Low rate or interest free balance transfers
- Low interest rate for purchases
- A decent cash back or rewards scheme for those who repay their statement balance in full every month.
- A card that has no charges for overseas transactions, such as those from Nationwide Building Society.
So whilst plastic can prove to be the financial downfall for some people when it's used in an irresponsible manner, if you play by the rules and use your cards to their strengths, they can make your life easier and far more cost effective.
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