If you are still regretting your Christmas shopping spree, why not use the gloom of your post-holiday credit card bill to spur you on to take control spending? If you’d like to pay no interest on your credit card in the year ahead, then now is the time to take action.
Here are ten mistakes consumers make when paying on plastic – and how you can avoid them.
How to use credit cards and protect your consumer rights...
1. Turning a blind eye
Two thirds of credit cardholders fail to monitor their spending, only checking statements once a month, according to research by comparison website, Moneysupermarket.com. Meanwhile more than one in ten credit card holders have no idea how much interest they are being charged.
“With almost 40% of credit card holders owning more than one card, and many admitting they don’t truly understand the terms and conditions, it’s easy to see how debt could spiral out of control,” said Kevin Mountford, banking expert at Moneysupermarket.com.
“Many people will use their credit card which, if used wisely, can help spread out the cost of big purchases, offer protection on purchases and help improve your credit score,” he says.
“However, if used badly you could incur unnecessary charges, end up in debt and damage your financial reputation – making it harder to get credit in the future.”
Read about mistakes that can damage your credit report.
2. Making the minimum monthly repayments
Only making the minimum repayment on your credit card each month will cost you a fortune in interest payments.
“Credit card providers love customers who do this as they are extremely profitable,” says Andrew Hagger, an independent personal finance expert at Moneycomms.co.uk.
The figures are quite scary – if you have £3000 outstanding at 18%APR and you just pay the minimum each month (typically 1% of balance plus interest from the last month) it would take more than 27 years to clear the debt and set you back £4000 in interest charges in the process.
Consider paying off as much as possible every month.
3. Exceeding your credit limit
All credit card customers are given a limit when they receive a new card based on their income and creditworthiness. But it’s not as straightforward as it sounds – and often, a limit is not exactly that.
Some credit card companies allow transactions to go over the limit, rather than declining the card at the point of sale - but if you do go over, it will cost you dear.
Always keep your spending beneath your spending maximum. If you have always managed to keep within the limit and only exceed it accidentally by a few pounds, contact your credit card provider as soon as possible and ask to waive the fee.
Did you know that paying by credit card offers you protection on purchases over £100? Read more about Section 75 protection.
4. Overlooking rewards
If you always pay your credit card off in full, look for plastic that will reward you for your custom especially if you shop frequently at one retailer. Marks & Spencer, John Lewis, Tesco and Sainsbury’s, for instance, all offer reasonable rewards on instore purchases.
“Although the cashback and rewards deals are not as generous as they once were, particularly away from the retailer’s own stores, they are still worth seeking out – after all, we all like to get something for nothing,” says Hagger.
5. Dropping the ball
Another potential issue with credit card spending is that you can become complacent – because you’re not handing over physical cash, you may not enough care to check the bill or the amount on the card machine before entering your PIN.
“Not checking your monthly statement is another poor financial habit – what if there is an error or fraud on your account – you wouldn’t pick it up until it was too late to do anything about it,” says Hagger.
More costly credit card errors
6. Withdrawing cash
Although you won’t have to pay interest on any spending on your card provided you repay the debt as soon as possible, the same isn’t true of cash machine withdrawals.
We are well accustomed to withdrawing cash from an ATM with our debit cards and not having to pay a fee – but don’t get caught out by assuming the same rules apply to your credit card, as you will usually be hit with a charge of around 3% of the amount you take out.
“On top of this you’ll also be charged interest, typically at an annual percentage rate (APR) of around 28% - and this will be levied from the moment you make the withdrawal,” says Mountford.
7. Missing credit card repayments
Forgetting to pay your credit card bill on time can prove expensive and not just in terms of extra charges.
If you are late with your credit card monthly repayment you’ll be charged a £12 fee by your card company, but potentially more of an issue is that this will show up on your credit record for the next six years.
If prospective lenders see you have a habit of missing repayments, you may find it harder to obtain credit in the future.
Plus, missing a repayment can have further consequences: if you have signed up to a zero-interest card for a fixed period of time, your lender may be entitled to withdraw the low rate and start charging interest after a missed repayment.
The answer is to set up a direct debit to pay the minimum payment (or full balance) each month – that way you’ll never miss a payment again.
How to protect your credit record
8. Using your credit card in the wrong way
Today credit cards are generally split into two groups: those designed for normal spending and those designed to help clear debts run up from other cards – these are known as balance-transfer cards.
But bear in mind that a card with a low interest rate for balance-transfers may charge relatively high interest on new purchases, so check before you spend.
Some cards have low rates for both spending and balance-transfers, but you could be better off getting separate cards for the different purposes.
9. Signing up for auto-renewals
Increasingly we sign up for annual subscriptions or memberships online – perhaps for annual travel insurance, a magazine subscription or a data plan when we buy a new tablet, but sometimes we forget we gave out our card details and can get caught out when we get charged again.
“The best thing to do is to make a note on your calendar a month before renewal – that way you can decide whether you want to pay to renew for a further year or cancel it if it’s something you no longer use,” explains Hagger. “It might sound like a bit of a faff but it will only take a few minutes and could save you some of your hard-earned cash.”
10. Not paying off your credit card debt in time
There are a number of balance-transfer cards which charge no interest for a certain period of time.
But if you don’t manage to pay off what you owe by the end of this period, the lender is likely to impose a high rate of interest on the outstanding debt.
If you move a debt on to a balance-transfer card, try to set up a budget that ensures you have cleared it before the higher rate kicks in.
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Next article: How to profit from balance transfer deals >>>