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By Russell Cavanagh
Staff Writer
Monday, 25 August 2008 |
Compare Credit Cards to Avoid Sneaky Traps
Top tips to avoid credit card traps:
- Even cards with 0% interest deals can end up costing a fortune
- Check carefully what does and doesn’t attract interest and how repayments are allocated on your particular card
- Avoid withdrawing cash and be aware of the implications if you do have to
- If you can’t settle transactions bearing interest, think about shifting your balance to another card offering a 0% interest period on balance transfers
 Compare 0% balance transfer credit cards
The safest credit card for cash withdrawals is currently:
Co-op Bank Platinum
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COMPARE credit cards to avoid sneaky interest traps and you can avoid lengthy and expensive repayments you otherwise may not have expected.
Credit card companies attract prospective customers with various deals such as introductory periods of 0% interest, free-gift reward packages or enhanced security features.
However, the credit card companies need to make money.
One of the ways they practically guarantee a nice little earner from unsavvy spenders is by allocating your instalment repayments in a prioritised order – paying off the cheapest credit first and deferring the high-interest transactions until last.
Some cards are worse for this than others.
How payments are allocated
When lenders allocate repayments towards cheaper items first, such as balance transfers or purchases attracting 0% interest, any remaining balance will likely attract interest.
Any items subject to interest will go further to the back of the list of items to be credited with each repayment received.
It’s particularly common for cash withdrawals to attract separate rates of interest; perhaps up to 30% (and maybe beyond) and applying from the actual withdrawal date.
Withdrawals are exactly the type of transactions that are put to the back of the queue when lenders credit repayments to your card account.
A simple example
As an example, Dave has an extended period of 0% interest over a year on his new card that applies to a recent purchase on which he owes £1,800.
With an initial extra payment to settle some small fees, he has only just started repayments of £150 per month so the balance will be paid off neatly within 12 months.
However, Dave also took out £100 on the card at an ATM late last Saturday night when he had no other way of getting some much-desired hard cash. Cash withdrawals on his card carry an interest rate of 29.9%.
The withdrawal was the day before he made his first repayment and Dave is happily set to continue the £150 per month payments.
However, as the money is going to pay off his interest-free purchase, the cash withdrawal isn’t yet being serviced and interest on this part of the balance is growing.
At 29.9%, the interest repayable on his £100 withdrawal will equal £29.90 by the time his purchase balance is paid off and this will continue to grow until the item is fully paid off.
Assuming any other interest-bearing transactions are paid off, his repayments will only then start to reduce the money owed on the cash withdrawal.
Avoiding the trap
Payments to any transaction attracting interest will consistently be deferred behind cheap-rate or 0% interest items.
It’s therefore a good idea to try to pay these off in full within the month or, in the case of cash withdrawals, immediately.
If you have messed up and have built up a considerable balance attracting interest, try to obtain a new card where you can transfer the balance to a 0% deal. This will give you a chance to try again and be more careful.
Good deals currently on 0% balance transfer cards are:
Be careful and be aware. Read the small print and start using your credit card wisely.
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