10 Credit Card Deadly Sins

As the UK’s personal debt continues to grow, debt awareness Credit Action reported that the total credit card debt in November 2006 was £54.9 billion, while the British Banker’s Association announced that the proportion of credit card balances bearing interest was more than 75 per cent in October 2006.

We’ve highlighted ten common credit card mistakes to avoid, so if you’re one of the 3.4 million credit card holders in the UK regularly only making minimum payments against their debt (Credit Action, 2007 - see useful links), pay close attention.

1. Paying interest

The golden rule to remember is that if you are paying any interest at all on your credit card, then you’re misusing it. Lots of people have savings without having paid their credit cards off but whatever interest you make on your savings, it will never be more than what you pay on your credit card. If you’re using your credit card you should always aim to pay the balance off in full each month.

2. Missing payments

Each time you miss a payment or go over your agreed limit your bank will charge you for doing so. In April 2006 the Office of Fair Trading said that the traditional charge of around £30, even for going over your limit by less than £1, was too much and advised that the charge should be capped at £12, which most banks have now done.

However, if you have been subject to these charges in the past, you may be able to claim the fines back. To find out how to do this, and for letter templates, go to the MoneySavingExpert website (see useful links).

Whether or not this works, you should bare in mind that what you should really be trying to do is avoid the charges in the first place. And although it won’t go on your credit score that you tried to reclaim the fines, the fact that you exceeded you credit limit or missed payments in the first place will. Click here to read our article on Rebuilding Your Credit Rating.

3. Getting cash advances

Taking money out from a cash point with your credit card is never free. Not only will you always be charged for doing this, but unlike store purchases, the interest on the withdrawal begins to add up as soon as you take the money out, so always try to use your debit card at cash points.

4. Spending to get rewards

Many people are tempted by reward credit cards only to find that they spend more just to get cash back, airmiles, or nectar points. These types of cards only ever give real rewards if you pay the entire balance off each month as the interest they charge will invariably be far more that the freebie you’re trying to get.

If you are responsible – very responsible – with money, you can get reward cards to really work for you. But you need to be sure that you will be able to pay the balance off in total each month, or you will end up paying much more in interest. Click here to read our article on Reward cards.

5. Making instant cash transactions

Just like cash advances, any transaction classed as “instant”, such as online gambling, begins to accrue interest as soon as you hit “pay”, so even if you pay your balance off each month you will still find yourself paying interest. Banks are currently widening their category of instant cash transactions, so make sure that you’re aware of any that apply to your account so that you don’t find yourself facing unexpected fees.

6. Pimping the market

The time of free, zero per cent balance transfers is gone. Banks have become wise to the “rate tarts” that continually move their debt in order to avoid paying their balances off, and have begun to charge for transfers. This could be a set fee, usually around £50, or a percentage of the balance. You should always do the maths before choosing your new card; a balance transfer of £7,000 at three per cent would cost you £210.

If you are still willing to move to an interest-free card you should also be realistic about whether or not you would be able to pay the balance off within the interest free period. If not, it might be cheaper to get a card with a low monthly rate, for the life of the balance, instead.

Compare the latest 0% balace tranfers credit cards

7. Having a deck of cards

Having a wallet teeming with credit cards is bad for your credit rating. The recent trend in balances around means that many people have a host of accounts – but this looks as if you have trouble managing your finances. You should close unused accounts and cut your cards as this will update your file, showing that you have less accounts. The same goes for unused bank accounts. It’s also a good idea to get in touch with a credit rating company to let them know when you’ve cleared an account to make sure that its been removed from your file.

8. Using a balance transfer card for purchases

Most zero per cent cards will have a higher rate of interest on purchases in order to make money on the card. If you won’t be paying the balance off each month, it’s better to use your debit card or to have another credit card, with a low monthly rate, to use for purchases.

9. Opening store cards

The basic rule here is that you should never get one. They charge far higher rates of interest than credit cards and the 10 per cent you usually get off your first purchase isn’t worth it in the long run. Also, subsequent store-card-holder-only offers will only encourage you to buy things you don’t need.

10. Would a loan be better?

If you’ve already made many of these mistakes and are paying a large amount of interest on your credit cards, you’re probably not making much of a dent in your actual balance each month. It might be cheaper to get a loan from your bank. Reputable loans have much lower typical APRs than credit cards, so paying off your credit cards with a bank loan could save you loads, allowing you to actually pay off your debts.

Use our Loan Calculator to find the best deal for you or for more information on loans.