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However religious you are about making credit card repayments, unless you pay off a large chunk of cash or repay the balance in full every month you are likely to be building up more and more debt. Here are traps to avoid if you want to ensure that your card repayments have the maximum impact:

1. The ‘most expensive debt first’ trap
Your credit card bill may include several different types of debt. There could be the money and interest you owe for purchases, for cash withdrawals and for any balance you have transferred from another card. You may think that as you are using the same card for each you will be paying one rate of interest. Unfortunately, with most card issuers, this is not the case. To make matters worse, the card company will not use your repayments to reduce the most expensive type of debt on your card.

For example, if you have transferred a £2,000 balance onto your card at 0% and then withdrew £100 at 28% and spent a further £1,000 on purchases at 15.9% your monthly repayment will usually be used to pay off the transferred balance, leaving the interest to build up on the cash withdrawal and purchase balances. This practice allows card companies to make as much money from you as possible.

Research from price-comparison site MoneySupermarket.com reveals none of the main eight credit card providers allocates repayments to the most expensive debt first, costing customers dearly. These lenders include RBS, Barclaycard, MBNA, HBOS, HSBC, Lloyds TSB, Capital One and Egg - which account for 87% of the lending market. One card issuer stands out as giving borrowers a fair deal - Nationwide clears your most expensive debts first. The building society is campaigning to bring this to the attention of all credit card users in the UK as it believes that other provider’s policies are unfair to customers. Along with a fair order of payments, a Nationwide credit card provides commission free purchases abroad.

Avoid the trap… by using 2 different cards for balance transfers and purchases. Avoid using your credit card to make cash withdrawals unless it is a dire emergency. 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.

2. The ‘direct debit’ trap… read on.

By Master Money on April 3rd, 2008
In: Tips / Dicas, Posts In English, Money / Credit / Insurance / Finance  | 

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