Don’t be fooled by the latest credit card tricks. Like a skilled magician, credit card providers are adept at a sleight of hand, which means customers can end up paying far higher interest rates than those advertised.
At the moment the most common ruse is the "double zero" trick. A number of card providers now advertise year-long interest free deals on balance transfers, plus three-months’ zero interest on new spending. It might look as though you can’t go wrong. But like those "heads I win, tails you lose" tricks this is one trap that is virtually guaranteed to catch unwary borrowers out.
The problem is that if you use these cards to make new purchases, any money spent on these cards can’t be cleared at the end of the three-month period.
If you have spent £400 and then try to pay off this money off when the interest-free period on new purchases ends, your payment will simply reduce the size of the transferred balance. Until this is cleared in full the money you have spend on the card will continue to accrue interest – usually at an APR of at least 15.9 per cent.
If you don’t want to be caught out by this trick don’t use these cards in the shops, at least not if you are transferring sizeable credit card debts to take advantage of the balance transfer deals.
Many people also forget that if they use their credit card to withdraw money from a cashpoint this is subject at a far higher interest rate. On average, customers will pay an APR of more than 20 per cent on cash withdrawals compared to an average of about 15 per cent if they are using their card in a shop or restaurant.
And yes, you’ve guessed it, in the vast majority of cases it is the cheaper shop purchases that will be paid off first. So if you spent £400 on your card and took out £50 from an ATM on a night out, then pay off £300 at the end of the month, the £50 will still be on your statement the following month, ratcheting up interest charges at the higher rate.
One of the golden rules of credit cards: never use credit cards in cashpoint, except in dire emergencies.
This isn’t the only trick to look out for. Many people also fall foul of rules buried in the small print. These state that if you fail to make minimum payments on time, or exceed your credit limit any "special offer" such as a low rate on balance transfers is immediately withdrawn.
No doubt this catches out many people around holidays, when it is easy to send your payment in late. The best way to avoid this is to set up a direct debit so that you know the minimum payment will be made each month.
Although credit card providers are far more upfront about it – don’t overlook the balance transfer fee. Every time you move debts from one card to the next you pay a fee, usually between 2 to 3 per cent of the outstanding balance.
While it can still make sense to switch to a cheaper card if you have large debts, these fees mean that it no longer makes sense simply to roll from one low interest card to the next. Far better use time that you have this low interest rate to pay off as much of the debt as possible. Remember too that these fees used to be capped, so people rarely paid more than £50. Now most are uncapped, and in some cases providers have introduced minimum fees of at least £30.
Now while most credit card companies employ such tricks there are one or two providers out there that deal their customers a fairer hand. Nationwide always makes sure that any payment reduces the most expensive debt first – a rarity in this market and a move that should be applauded.
Similarly Capital One and Halifax both offer "double zero" cards where the interest-free period is the same for both balance transfers and new purchases, so customers aren’t caught in the same trap.
Abbey has also just launched its own "zero" card which promises no balance transfers fees, no fees for cash advances, and (like Nationwide) no foreign usage fees. It also charges no interest on either balance transfers or new spending for the first six months. So next time you switch your credit card, look out for the string and the hidden trap-doors and try to conjure up a trump card in your wallet.
By Emma Simon