Clare Francis, Site Editor
There are some great credit card deals available. However, unwary consumers are at risk of being caught out by the complicated repayment system most card providers use.
There are three main ways to use a credit card: for spending; transferring a debt over from another car and withdrawing cash from an ATM. But did you know that if you use a card for all three purposes, you could well be charged three different rates of interest? What's more, if you do not clear your balance in full each month, your monthly repayments will probably go towards paying off the cheapest debt first, leaving you accruing interest at the highest rate.
For example, say you had a card which charged interest at 5% for balance transfers, 15% for purchases and 25% for cash withdrawals; you transferred a debt of £1,000 over from another card, made purchases totalling £500 and withdrew £200 from a cashpoint. In total you owe £1,700 but you can't afford to pay it all off at once so you just repay £100 a month. That money will, more than likely, go towards paying the transferred balance off first. Once that has been cleared you will start repaying the debt from the purchases and finally you will repay the £200 you took out of an ATM.
By applying this strategy your card provider maximises the interest it earns from you. You should therefore only use a credit card for one purpose to avoid being charged interest at different rates. However, this isn't always as straight forward as it seems, particularly as many deals encourage customers to use the card in a number of ways.
Card providers try to attract new customers with enticing offers such as interest-free periods which often apply to both purchases and balance transfers. If you see such a deal, check how long the introductory period lasts for.
For example, Halifax has an online offer on its One card: new customers can take advantage of a 12-month interest-free period on both transfers and purchases. In this case, it is fine to use the card for spending on as well as making a balance transfer, because the interest-free periods run for the same length of time. However, if the 0% deals expire on different dates you should only use the card for a single purpose.
Virgin, for example, has a 0% offer on balance transfers and purchases, but the introductory offer lasts for 15 months on balance transfers - the longest interest-free period on the market - and only three months on purchases. So, if you used the card for both spending and moving a debt over from another card, you would start accruing interest on the cost of the purchases from the fourth month. Virgin's standard rate of interest for purchases is 15.9%. This card should therefore only be used for balance transfers.
You should never use a credit card to make cash withdrawals. Not only are you likely to be charged a very high rate of interest, but you will incur other charges such as a handling fee. You also start accruing interest immediately. If you make a purchase with a credit card, you will not be charged interest if you repay the balance in full within a certain amount of time - typically 56 days. With cash advances you start paying interest from day one.
It is well worth reading the terms and conditions of a credit card before you start using it to make sure you understand how the provider's payment allocation system works. There are a few firms, including Nationwide building society and Saga, which clear the most expensive debt first, but the vast majority work the other way around: the ill-informed could therefore end up paying significantly more interest than they were expecting.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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