Crucial credit card DOs and DON'Ts
These days, most of us carry at least one credit card in our wallets.
However, very few of us have time to sit down with a magnifying glass and decipher the tiny print in our plastic's terms and conditions.
If you don't have the first clue about payment hierarchies or couldn't hazard a guess at what 'MMR' stands for, read on for a crash course in how - and how not - to use your flexible friends.
1. DON'T pay interest when you don't have to
Unforeseen costs have a habit of creeping up on us when we can least afford them.
However, a 0% purchases credit card will help spread the cost of an expensive item over an extended period of time - without charging you for the privilege.
Remember, though, that 0% purchases deals are temporary promotions. If you fail to pay off your balance within the offer period or don't switch it to another 0% card, you're likely to be hit with a much higher rate of interest when your deal expires.
If that ship has sailed and you're already paying a high level of interest on previous spending, you may want to consider shifting your expensive debts to a 0% balance transfer card.
Although you'll probably have to pay a small fee to shift your debt, these clever cards eliminate interest charges so that every penny you repay each month goes towards beating down your total balance. This should allow you to clear your debt more quickly and cheaply.
The longest 0% balance transfer deal currently on the market comes with the Virgin Credit Card and lasts for 16 months. You'll have to pay a 2.98% to transfer a balance to this card.
2. DON'T spend on a balance transfer credit card
If used wisely, a balance transfer credit card can be a brilliant way to pay down old, expensive debts more quickly and cheaply.
However, in order to avoid being stung by what's known as negative payment hierarchy, it's vital you remember this golden rule: never spend on a balance transfer card.
This is because most lenders will weight your repayments towards your transferred balance, placing your new purchases at the bottom of the payment priority list.
As a result, you won't be able to tackle the debt you've built up by spending. It'll be busy accruing hefty interest charges until you've cleared your entire balance transfer!
If you do need to spend on your balance transfer credit card, choosing a card with an identical 0% balance transfer and 0% purchases period should help you escape the peril of negative payment hierarchy.
The Bank of Scotland All In One Credit Card and the Halifax All In One Credit Card both offer 0% on balance transfers (for a 3% fee) and 0% on new purchases for a 9 month period.
3. DO try to make more than your monthly minimum repayment
If cash is tight and your budget's over stretched, it can be tempting to simply make the monthly minimum repayment (MMR) your credit card provider demands.
However, only ever paying the MMR means it could take you years - if not decades - to clear your debt. What's more, huge amounts of your hard earned cash will be gobbled up by interest payments along the way.
For example: my pal Paul owes a fairly modest £2,500 on his plastic at a rate of 17% APR.
The MMR on his card is 2% of his balance, or £5 - which ever is the greater.
If Paul continues to pay the MMR each month, it will take him an incredible 419 months to clear his debt - that's nearly 35 years! In addition, he'll pay almost £4,500 in interest during that time.
On the other hand, if he simply pays a flat sum of £50 per month (the same sum as the original MMR), Paul could clear the card completely in 70 months - just under six years. In addition, he'd pay a far lower £1,605 in interest.
4. DO pay your credit card bill on time
If you fail to pay your credit card bill on time or exceed your credit limit, you're likely to be stung with a nasty fee of around £12.
Even worse, you could also damage your credit rating. This could make it harder for you to obtain credit in the future.
One of the safest ways to ensure you never miss a payment is to set up a direct debit that will cover at least the minimum repayment required by your lender.
If you have a balance transfer credit card, it's particularly important to do this. Should you miss a payment or exceed your credit limit, your lender may not only charge you for the privilege - it's possible your 0% or low rate deal may be withdrawn!
If you do falter on a payment, contact your credit card provider immediately and eat some humble pie. If this is the first time you've missed a payment, your lender may waive the charge or allow you to keep your promotional deal.
5. DO consider a clever cashback credit card
If you regularly use a debit card to pay for every day expenses, ditching it in favour of a cash back credit card could make you hundreds of pounds a year.
Right now, if you can snag the American Express Platinum Cashback Card, you'll earn 5% cashback on everything you spend during the first three months. You'll also receive cashback on subsequent purchases, on a sliding scale depending on how much you spend.
However, it's crucial you repay your card balance in full and on time each month. If you don't, your cashback benefits will easy be outweighed by the interest charged on your debt.
Don't forget, another advantage of using a cashback credit card for everyday spending on items that cost between £100 and £30,000, you'll be protected under Section 75 of the Consumer Credit Act. This states that if a retailer doesn't deliver your goods (or they aren't as described), you can seek compensation from your credit card provider as well as the company that sold you the item.
**Articles featured on BeatThatQuote.com are for information purposes only and reflect the views of individual writers. Articles are not, and should not be considered as, financial advice. BeatThatQuote.com strongly encourages our readers not to rely solely on information contained within this article/our website, but to conduct their own research and seek independent advice about the financial products they purchase.**
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