Credit Cards - Don’t be Fooled

What to look out for
When people take out a loan, even a loan “doorstep” loan, they know exactly what to expect, all charges and fees are fully explained. Not so with credit cards.

A recent report shows that credit cards can be far from easy to understand. Even a maths professor struggled to understand some methods used by card companies to calculate charges.

Annual Percentage Rates
If you believe that two cards displaying the same annual percentage rate (APR) charge identical interest, you would be mistaken.
Card companies use ten different ways to calculate interest charges, with each method impacting on the cost of credit. MBNA charges interest from the date a transaction is made, while HSBC customers wait until the payment is debited on their account.
These differences can result in a credit card with an APR of 22.7 per cent being cheaper than one that displays an interest rate of 11.9 per cent.

Borrowing on Credit Cards
Borrowing on a credit card can work out to be extremely expensive, even if the headline APR appears competitive.
The total cost of borrowing £2500 on a certain credit card with an APR of 14.9% is £4,040.
This works out at £61.60 charged for every £100 borrowed, far out weighing the typical £40 per £100 cost of a doorstep loan.

Fees and charges
Penalty fees for exceeding agreed credit limits or paying late are standard across the industry.
Some of the most well known credit card companies have some of the highest charges.
MBNA, Bank of Scotland, First Direct, Halifax and Sainsbury’s Bank impose some of the harshest, charging customers £25 for each offence.
Customers who get moneyback on their credit card can be dealt a double blow if they incur any default charges. Any cashback entitlement is withdrawn immediately.

Minimum repayments
One good thing about credit cards is that they can have very low monthly repayments. However if you pay the minimum amount each month, you may never clear your debts!
Customers with large balances often pay only fees and charges, plus a £5 minimum charge, resulting in them taking far longer to clear their debt.

These practiceshave been branded as “underhand” and a “privatised form of stealth charges” by Norman Lamb, MP, a senior member of the Treasury select committee on credit cards.

Risk-based pricing
Card companies such as Barclaycard and Halifax quote one APR in their adverts, but customers could end up with a much higher charge. They set customers interest rate by their credit worthiness.
While Barclaycard boasts a “standard” interest rate of 14.9 per cent, its rates go as high as 24.9 per cent. Always check if the card company has a “pricing-for-risk” strategy and ask yourself if the card is worth having, in case you receive a higher interest charge than the headline advertised rate.

Credit Card Guide

• Always check and compare what default charges are before signing up for a credit card.
• It’s a good idea to set up a monthly direct debit for the minimum payment. This way you should always avoid late-payment charges
• If you receive any credit card cheques, rip them up. Cardholders are typically charged 2 per cent each time these cheques are used.
• Think twice about ordering a duplicate statement. They typically cost £5 each.
• Always pay more than the minimum sum if you can afford it.
• Try not to use your credit cards for borrowing.
• If you have a high balance and are struggling to reduce it, you may be better off with a fixed term loan to clear your balance completely.