Avoid credit card nasties

By Sarah Modlock

25 January 2006

There is so much competition for our business now that we would have to be barking mad not to shop around for the best of everything. This is certainly true of credit cards. With so much choice and something to cater for every type of spender, we should be beating the card issuers at their own game every time.

Of course, paying attention to the headline rate of interest - the APR - is important, but don't let it blind you to other fees, charges and costs which may be hidden in the small print of a credit deal.

Late payment and over-limit penalties

Late payment and over-limit charges are relatively new on the credit card horizon but a lmost five million UK credit card holders paid a penalty fee on their plastic in 2005, according to new research from MoneyExpert.com and Defaqto. The study reveals that more than 10% of the population racked up charges for items such as late payments and exceeding credit limits. It also found as many as one in five cardholders do not understand fully how a credit card actually works.

Imagine paying your balance off in full, missing the payment date by one day and finding that the subsequent late payment charge pushes you over your limit to yet another charge. Expect to pay around £20-25 for each. Avoid them by being clear about your payment date and meeting it in good time. Setting up a direct debit will help but be aware that some banks take several days to transfer cash from your account to the card issuer, even though the cash disappears from your bank account as soon as you make the payment.

'A single late credit card payment can cost as much as £35 so it is worth handling your finances well,' explains MoneyExpert's Sean Garnder. ' It is worrying that so many people do not feel adequately informed about their credit cards. The current market puts such an emphasis on interest rate that people may have lost sight of the complexities of some financial products,' he adds.

Andrew Hagger of Moneyfacts advises: 'If you are close to your credit limit, rather than risking the cost of hefty penalty charges, contact your card provider for a temporary limit increase to give you some extra flexibility, but bear in mind credit cards are not the best vehicle for longer term borrowing and perhaps a personal loan may be a more cost effective option.'

The Office of Fair Trading is currently investigating the level of charges levied by card firms with the aim of forcing them to cut fees. It has already written to eight providers ruling that their late payment charges are 'excessive'.

'Typical' rates

Another classic nasty to watch out for - 'typical' rates can be used by lenders and card issuers in their promotional material or adverts but there is a catch - they do not have to offer the seductive, low rate to everyone. Instead, they can decide to offer a much higher rate once they receive your application. When a typical rate is advertised, the borrower will not know the exact rate they will get until they apply, making it difficult to shop around. The lender will run a credit check on them and offer a rate based on that. This is also known as 'pricing for risk'.

One in six Brits don't get credit at the rates they applied for according to a survey by moneysupermarket.com and many people are not aware that being rejected can adversely affect future credit applications. The research shows the extent of the credit lottery, where 93% of loan providers offer ‘typical' loan rates calculated on a price for risk basis. Under current OFT guidelines, lenders are obliged to offer the typical rate to just 66% of all accepted applicants so a third pay rates higher than the typical rate and this will not be known until after the application has been made. Disappointingly, the 66% limit is presently not policed by any organisation, although the OFT is about to undertake a review of the situation. Don't be afraid to decline the loan or card if the rate offered is too high. Leaving plenty of time to shop around before you need the card will help you avoid having to accept whatever is offered.

Other gremlins

Annual credit card fees used to be very common but as plastic gained popularity, the fees dropped away. However, some card issuers have re-introduced them so look for one of the many cards offering good deals without annual fees. The fee may be disguised as a contribution towards services available to the card holder, such as discounts on hotels or hire cars. Make sure the special offers outweigh the cost of the fee.

Cheeky transaction and withdrawal fees when using your credit card abroad are increasingly common and often apply whether you clear your balance in full or not. Only a very small number of cards do not charge these but you can avoid them by knowing what your card charges and taking travellers cheques and currency or using a debit card to withdraw cash and make payments.

Good luck with you battle against plastic menaces. For more information about credit, visit our Credit card section.