How To Beat Higher Credit Card Charges

It’s no secret that many of the charges levied by credit cards have been steadily increasing over the last year or so. Credit card companies are keen to replace the profits they’ve lost from an increase in bad debts and the reduction in penalty charges forced upon them by the Office of Fair Trading.

But it’s certainly not all bad news for credit card users. In fact, the current offers available in respect of balance transfers and purchases are arguably as good as they’ve ever been. For example, there are over a dozen cards offering 0% balance transfer deals that last for longer than a year. And there are half a dozen that offer 0% purchase deals for at least a year.

Balance transfer fees

0% balance transfer cards were first introduced in 2000. However, it wasn’t until 2004 that the first balance transfer fee was introduced. Within eighteen months or so they became the norm. They started off at 2% and were often capped at £50. This meant that any additional balance transfer over £2,500 didn’t cost you more.

These offers were too good to last unfortunately. So these days a fee of 2.5% or even 3% is more usual for the longest balance transfer deals and it is very rare to see a capped deal. But as the average balance transfer is around £2,000 less than half of people will have been affected by the removal of capped fees.  However, a £5,000 balance transfer now costs around £150, whereas it would have cost just £50 a couple of years ago.

Despite this 0% balance transfers still represent good value for money when stacked against other forms of credit. Assuming you pay off your entire balance over the course of a year, it represents an annual interest rate of around 6%. This is cheaper than any personal loan you can get at the moment and it’s cheaper than most mortgages too!

If you need longer than a year to clear the debt, the numbers still stack up but only if you’re able to get more 0% balance transfer deals until you’re able to clear the debt in full. As a rule of thumb, if you think it’s going to take you longer than two years to clear your debts, you’d be better off looking at longer-term options like a personal loan or a lifetime balance transfer deal (although these are quite hard to find now).

Be wary of mixed offers

What could be better than a 0% balance transfer card? Surely a card that offers 0% on purchases must be even better value for money?

You’d think so wouldn’t you? But this is where credit card companies get crafty. They offer a long deal on balance transfers and a much shorter one on purchases. Then they allocate any money you pay to the debt that has the least interest, i.e. the 0% balance transfer. So you will be charged interest at 15% to 20% on your purchases until you’ve paid off all of your balance transfer.

Unfortunately, most credit cards these days have different periods for balance transfers and purchases. A typical deal is 12 months for balance transfers but just 3 for purchases. So any purchases you make could be charged a full rate of interest for 9 months.

The solution is quite simple though. Use one card for your balance transfer and, upon pain of death, don’t spend any more money on it. Get a second card that offers a long 0% purchases deal and use that for your spending instead.

Cash withdrawals

Rates for withdrawing cash on your credit card have also been spiralling recently. Even before these rises however, using a credit card to withdraw cash represented very poor value for money.

You get hit in three ways. You’re charged interest straight away rather than the date of your next statement. Annual interest rates for cash withdrawals are higher than any other form of transaction and have recently gone from an average of 20% to around 25%. Finally, there is also upfront charge in addition to the interest. The average here has risen from 2% to 2.5%, with a minimum charge of up to £3. So for a typical £50 withdrawal you pay an effective 6% upfront fee plus interest of 25% pa. Nasty stuff.

Often you’ll see these rates stated as monthly rather than annual charges. This is make them look more reasonable but don’t be fooled. 1% a month is equivalent to 12.7% a year. 1.5% is 19.6% and 2% is 26.8%!!

Using credit cards on holiday

Using credit cards abroad offers much better value for money than cash withdrawals. You get an excellent exchange rate, much better than a bureau de change, but suffer a one-off fee. These fees have been on the increase too, you won’t be surprised to hear, and can now be as high as 2.95%. The honourable exception here remains the Nationwide credit card, which charges nothing at all. If you spend a lot of money overseas this is well worth investigating.

So it’s far from gloomy news as far as credit card charges are concerned. Most of the increases can be avoided if you’ve got your wits about you.