How Many Credit Cards Do You Need - Play your credit cards right How to win at cards
This chapter describes ten helpful actions and behaviors that will bring you…
If you are imaginative and can plan ahead, your credi cards could cost you nothing, and even make money for you. But first you have to deal yourself a winning hand, Peter Willis explains how.
Never to play cards with a professional is wise advice, and you might think that when the game is between you, as a credit card user, and the card issuing company, the company will hold all the aces, and the odds are stacked in favour of the ‘house’.
After all, the companies have recently been under fire from a Commons Select Committee over lack of transparency. They called in a university professor of mathematics to explain the interest charges to them, and he had to confess that he couldn’t understand them himself.
And a recent newspaper headline - “The great credit card rip-off” - alleged that Barclaycard, the biggest UK issuer, made an average of £70 a year from each of its cardholders.
But it’s not quite as one-way as that. The credit card issuers, and there are many of them, are competing for your custom, and they are willing to put some spectacular deals on the table to get it. Interest-free balance transfers, and cash rebates for instance. Too good to be true? They can be, but not always. If you remain alert, and play your cards right, you can make sure the deals work in your favour. And ensure that ‘0 per cent interest’ really does mean 0 per cent.
First, though, a quick refresher on how credit cards actually work. As most people are aware, most cards provide an interest-free period on purchases, usually of up to 59 days. You buy something, it appears on your next monthly statement, and you have a little under a month to pay it before interest is charged. The catch, though, is that this only applies if you pay off your balance in full by the due date each month. If you owe anything at all, then for any new transaction, you start being charged interest immediately.
Now, assume you’ve just taken up the offer of a new credit card, with 0 per cent interest for six months on balance transfers, and transferred a few thousand pounds worth of debt to it. Being a prudent and well-organised person, you then use it to pay for purchases of petrol and such-like, which you duly clear each month by the due date, and believe you are thereby avoiding interest payments. You aren’t. And what’s worse, they may be rolling up. Supposing you spend £200 a month, and pay it off at the end of the following month. If the interest rate is 1.5 per cent a month, then it will cost you, assuming an even spread of spending throughout the month, about £4.50. Not too bad, you might think, but you haven’t actually paid off that £200 - the payment has gone to reducing your balance transfer - so you are still paying interest on it, and on the subsequent months’ expenditures, six months later. So, on this example, your interest-free period will have cost you in the region of £94.50. To put this into context, an interest-free six months on a balance of £1,000, where the normal rate is 1.5 per cent represents a saving of £90.
Different card issuers have different ways of constructing these ‘payment hierarchies’, and the rates of interest differ, but - with the exception of a handful of cards which offer an interest ‘holiday’ on purchases as well as transfers - the net effect is much the same. Interest-free is not necessarily cost-free.
There is one simple way out of this trap. Use two cards. Keep one - possibly your existing card - strictly for purchases, and pay it off scrupulously by the due date. You can set up a direct debit to make sure this happens, but be sure to specify that it is for the full balance, not the minimum amount. The other card will be taken out specifically for holding your balance transfer. It will require a minimum monthly payment, either a small percentage of the outstanding balance of a flat rate of as little as £5. Again this can be dealt with by direct debit, but this time be sure it’s for the minimum amount - or you may find your balance transfer sucked straight back to your bank account. Towards the end of the interest-free period, which can be up to nine months on some cards, simply apply for a new card, and move the balance on. It is of course a small step from buying something - such as a large capital purchase - on credit, and moving the debt immediately to a new 0% card, to giving yourself an interest-free loan by requesting a balance transfer in excess of the amount to be paid-off (surprisingly, the card companies don’t check).
While on the subject of interest free cards, certain providers such as MBNA and Egg allow transfers to bank accounts. Why not transfer the full limit you have been allowed into a high interest savings account? Here, interest free means extra interest - in your pocket. However, remember not to spend the money you have on deposit, and ensure that you diarise for its repayment in full at the end of the interest free term - unless, of course, you are able to repay the credit card with another interest free offer.