How to cut the cost of credit cards
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Staff Writer
Ruth Jackson Feb 03, 2009
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Bank of England base rates may be falling but that doesn't mean the cost of borrowing is dropping for everyone. If you have a credit card your debt may be increasing a lot faster than you think.
For example, the average interest rate on credit cards rose to 17.7% in December, up from 16.6% a year earlier. Meanwhile, Capital One hit the news last week after announcing it was raising rates on some of its cards by almost 7%.
There is, however, some good news. Last month, credit card firms agreed to new consumer safeguards following a meeting with the Business Secretary, Lord Mandelson. Under the new guidelines, credit card firms must give 30 days' notice of interest rate rises, they cannot raise interest rates for a year after a customer has signed up for a card, and after that they can only raise rates every six months.
Trouble is, none of this stops a credit card company charging whatever rate it likes. So here are some tips that should reduce the cost of credit.
What to do if you have big credit card debts
If you can afford to, pay off your credit card - it is one of the most expensive forms of debt. If you have savings (beyond a three-month emergency fund), use them, because the rate at which your debt grows on most cards is likely to exceed the paltry rates available on savings.
Even if you can't afford to clear the whole debt there are still a number of things you can do to reduce the burden.
First of all, make sure you are paying as little interest as possible. One option is to apply for a 0% balance transfer credit card. These cards allow you to pay no interest on any debt you transfer to them for a set period - at present, the best deals offer you 14-16 months' interest free. And if you are already on a 0% offer but it's close to running out, switch to another one. Visit MoneyFacts for a round up of the best deals.
Next, work out how you are going to pay off your remaining debts.
Try to pay off more than the minimum payment every month. The minimum payment is often only 2% of the balance, meaning you could be accruing more interest each month than you are paying off. Even the smallest increase in the amount you pay off can make a big difference to how quickly you clear your debt. To see the impact of this, try The Daily Telegraph's credit card calculator.
Then set up a standing order for the monthly amount you can afford - and make sure it leaves your account several days before the credit card payment deadline to avoid any charges for late payments. This is especially important when you have a low promotional interest rate, as a late payment can result in this rate being cancelled and your debt being moved to the firm's standard rate.
The golden rules of using credit cards
Avoid using your balance transfer credit card, as only the amount transferred gets the low, or zero, rate. Other purchases will accrue interest. And as repayments on most credit cards go to paying off the debt which accrues the lowest interest first, the interest on purchases will amass for the whole time you are clearing the debt.
Never take cash out on your credit card. The moment you withdraw cash from an ATM using a credit card you will pay a hefty interest rate plus typically a handling fee.
Never use a credit card cheque. These are not the same as the cheques you draw on your bank account. Your credit card firm will charge you a one-off fee for using their cheques - sometimes as high as 3% - on top of interest charges which will be far higher than the interest rate you pay for card purchases. Furthermore, these cheques aren't covered under Section 75 of the Consumer Credit Act either (see below for more on this). So unlike purchases made on a credit card, if something goes wrong you can't claim your money back from the credit card firm.
Credit cards aren't all bad news
If you can afford to pay off the full balance every month, credit cards can be useful. They offer much better consumer protection than, say, writing a cheque thanks to section 75 of the Consumer Credit Act. This says that your credit card company is jointly liable for any purchases you make along with the original supplier.
So if the supplier fails to fulfil its duties under the Sale of Goods Act by sending you faulty goods, or even goes bust before delivery, you can claim the money back from your credit card company, assuming the item cost between £100 and -£30,000. In the current climate, with companies going bust left, right and centre, this protection is worth having.
• This article is taken from our weekly MoneyWeek Saver email. Sign up to MoneyWeek Saver here.
• Merryn Somerset Webb is away
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