SAGA — Doing things properly

Fantastic plastic - November 2006

Last summer the banks cut their penalty charges - but put up interest rates. On the 47 cards that went up, the average rise was nearly 2% on purchases and just over 3% for those foolish enough to use a credit card to take money out of a cash machine. Some put up charges by more still - one went up from 10% to 15%.

So avoiding the cost of credit cards is more important than ever. Of course some people solve this problem by not having one - or if they have one cutting it up and putting the pieces in separate plastic recycling bags. But they are missing out on ways to make money from the banks.

•    Safety first. If you do throw away a card for any reason, cut the number into bits and separate the bits into different bags. And, for the ultra cautious, put the three digit code on the signature strip in bits into a separate bag of general rubbish.

General use

If you have savings the general rule is - don't borrow. Use your savings to buy things and pay yourself back. The interest you lose - maybe 5% at the most - will always be less than the interest you would pay on a loan - from 9% to 30%. And if you miss a payment you are less likely to charge yourself a penalty or send round the bailiffs!

But just about all credit cards give you up to 56 days interest free credit. You buy stuff today, the bill arrives some weeks later and if you pay it off in full within a few weeks of that then you are not charged interest. So paying with a credit card can be good business. You keep your savings earning their 4% or 5%.

Shop with a credit card. And then use your savings to pay the bill up to nearly two months later. If you do that every month for all your spending of, say, £200 a month then by the end of the year you might have made an extra £10 in interest. It is a modest amount but that is money in your pocket not the bank's. And that can only be a good thing.

If you do not think it is worth saving £10, then take a tenner out of your purse or pocket and tear it up! You won't do it will you? So saving a tenner is worthwhile.

•    Two things to remember. Always pay the bill in full on time - a direct debit will make sure that you do. Second, never use the card to take out cash. There is never an interest free period on cash advances.

Zero per cent

If you can stretch the interest free debt further you will save more. And believe it or not the credit card providers are lining up to help you. To attract business they offer very good deals to new customers. Several offer 0% on purchases for a period of time - usually six months but sometimes you can find offers that last longer. If you get one of these cards you can put all your normal spending on it, keep the amount you spend earning interest in a savings account, and then pay off the lot at the end of the offer.

•    Three golden rules. Do not spend more than you can afford to pay off. Do not miss the date for the final payment - call the card company and ask what it is so you are absolutely sure. Cancel the card (and cut it up, see above) as soon as the deal is over so it starts to come off your credit record. That will make it easier to take out a new card when you spot the next great offer.

There is another good use for zero per cent cards - Christmas. Even if you do not have savings now is the ideal time to take out a card that charges zero per cent on purchases and use it for that Christmas splurge. You will then have several months to pay off your Christmas bills without paying interest. Remember never to use the card to take out cash. They never charge zero percent on that - more like 29% in some cases.

If you are really a good card user who pays the debt off in full each month without fail, then you could branch out into a cashback card. These offers are not so great now, but you can get 0.5% or even 1% of all you spend credited back to you. Some come with a short term offer to credit back 3%. These cards literally pay you to go shopping. But never miss a payment - you will lose more than you make.

•    Tip. Cards that give you 'rewards' or 'points' or give money to charity are not a good idea. You (or the charity) get very little back. Go for cash.

Managing debt

So far the advice has been for people who do not want to owe money and pay interest. But credit cards can also be good for those who do have debt and want to manage it better. They can also use the special offers that card companies use to attract new customers. Until recently there was a merry carousel you could jump on. So desperate was the competition between the banks that they offered people zero percent on debts they transferred. So you could have a debt of £3000 on one credit card and be paying 15.9% (£477 or nearly £10 a week just to pay the interest) and move it to another card that charged you nothing for the debt for a period of six months or even longer.

There were so many of these cards that some people moved debt around every few months and paid no interest on it for years. Those days are just about gone. There are cards that charge 0% on balance transfers but they will normally demand a 2% fee to move the debt. So they are no longer free, though the deal is still not that bad especially if you get a year at 0%. Of course you have to be sure to move it to another zero percent card every few months - or of course pay it off.

Another solution to a long term debt is a kind of card called 'life of balance' transfer card. With these you move the debt to the card and until that debt is paid off you will be charged a guaranteed and low rate of interest. Offers come and go but one card was offering as little as 3.9% this year. Typically though the cost might be 6% or so. These can be a good idea for people who have got into debt they cannot repay at once and want to reduce the cost while they pay it off over a few years.

•    There is one absolute unbreakable rule with any card to which you transfer a debt. Do not ever use it for spending. If you do, you are the customer the bank wants. And that is not a good person to be. While the debt is left at the low or zero offer rate, anything you buy is charged at a very high rate. And guess what? The money you pay each month will be taken first to repay the loan. So you will be stung for the full interest on the purchases.