However, once you know about some of the
tricks they use, you'll be ahead of the game and will be able to make more
efficient use of your card, with lower monthly bills and smaller charges to
your account.
The first trick, the balance transfer fee, is now very well known, mainly
because advertising regulations mean that if it's present it must feature
prominently in marketing material. This fee is charged as a small percentage
of any balance transfer you make onto the card, usually after being
attracted by a 0% introductory deal or a low rate for life offer.
Unfortunately, balance transfer fees are pretty much a fact of life for
credit card users these days, and it's all but impossible to get a balance
transfer card with no fee. The best you can aim for is to get the lowest
percentage fee possible.
As well as being used for purchases, credit cards can also be used to obtain
money from cash dispensers, a feature known as a cash advance. This area is
a real money spinner for card issuers. Not only do they charge a higher rate
of interest for money borrowed in this way, sometimes twice as high, they
usually charge a fee of two to three per cent of the money you withdraw as
well. Furthermore, there's usually no interest free grace period, and so
you'll be paying interest on whatever you withdraw, even if you settle the
balance in full at the next statement. In a final, somewhat sneaky move,
card companies have started to widen their definitions of a cash advance.
Some usages of your card such as paying for online gambling are now regarded
as cash advances by some issuers, and charged accordingly.
Perhaps the most insidious form of 'hidden' charge comes under the slightly
obscure name of Allocation of Payments. This system means that any
repayments you make go towards repaying the lowest interest kind of debt on
your account first, leaving the more expensive parts of your debt untouched.
For an example, if you transfer a balance of $5000 onto a card at a lifetime
rate of 5%, and then make a cash advance of $200 charged at 25%, then that
$200 will sit in your account attracting the higher rate until you've
completely cleared the $5000 balance transfer. None of your repayments will
reduce the amount of your debt being charged at 25%. This means that the
only effective way to use a balance transfer facility is to transfer the
balance, and then never use the card again for any reason until you've
cleared the debt.
The last trick that we'll look at is the reduction of minimum repayments.
Once, the normal repayment you had to make each month was around 5% of your
balance. Over the years, this has fallen to an average of 2.5%, meaning that
a higher proportion of each repayment goes towards paying interest, and less
towards reducing your debt. A minimum repayment of 2.5% is only marginally
higher than that needed to service the interest charges, and will mean your
debt will take years longer to clear than it should, costing much more in
interest. Even if it's only by a small amount, you should always try to pay
more than the minimum required each month.
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About the author:
Michael writes for http://www.cardsense.co.uk/ where you can get up to date
information on products including the Egg Card, Barclaycard, MBNA Rewards
and many more.
FREE 3-in-1 Credit Report with trial! Click here!
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