No matter how responsible you are when it comes to credit cards, they still come with a number of pitfalls. As soon as you navigate your way past one, yet another emerges. Here are 9 credit card pitfalls.
The minimum payment on many credit cards barely meet the interest being incurred on your debt, which means if you only ever make the minimum, you’re debt will never reduce and seem to be endless. Occasionally a card will be offered with such a low minimum monthly payment, that your debt ends up actually growing.
So if you want to ensure that your debt ends up being a thing of the past, then make sure you make payments well in excess of your minimum monthly payment.
Perhaps the single most important thing when it comes to understanding your credit card debt, is the concept of negative payment hierarchy.
Simply put, when you make a payment towards your debt, the money is used to pay of the debt which is attracting the least interest, whilst the debt that incurs the most interest is left unpaid.
So for example if you have part of a balance on a zero per cent transfer deal, and the rest attracting interest at 18 per cent APR, and you make a $500 payment, thinking you will reduce your debt, well that money goes towards your zero per cent deal, whilst the balance that costs 17 per cent continues to remain unchanged and attracting interest until the full debt is paid off.
The easiest way to avoid this pitfall is to have one card for your balance transfer and a separate card which you use for purchases. That way you can isolate which debt is paid off whenever you make a payment.
Balance transfer deals are unquestionably a good way of reducing your overall cost of debt. But they do have hidden costs, for example through NPH a 3 per cent fee for a zero per cent balance transfer might on the face of it seem very reasonable, but might actually mean an APR of 4 to 11 per cent.
If you want to ensure you have a low APR, you should look for longer deals with lower fees. Save your money in an account that pays reasonable interest, and pay the entire balance off at the end of the offer.
When you transfer a balance onto a zero per cent card, the fee is usually added to the balance, but some lenders may class the fee as being a purchase and charge you interest on the fee and because of NPH, the fee will continue to incur interest until the whole balance is cleared.
So make sure you read the fine print, understand the terms of the deal, and kick up a fuss if something like this happens when it shouldn’t.
Typical APR’s quoted by lenders are only ever offered to customers with the best credit score, and for most people lenders offer APR’s which can often be much higher than the typical APR quoted.
Some lenders may even reject the application outright, and pass the details on to a less than savory lender who will make the loan.
If you have been rejected, then do not take out a product offered by a third party, and make sure you check your credit report for any errors.
Even if you manage to obtain the typical APR, they are exorbitant at the best of times, and can average as much as 10 per cent above the cheapest personal loans, and lenders can hike interest rates at will. So always keep your options open, and if you can, balance transfer the debt and take advantage of low interest rates.
Lenders can calculate their interest in different ways, and some estimate that there are as many as 12 different methods, which means APR’s can have very little meaning.
The best way to avoid this is the age old zero per cent balance transfer, but you should also seek to avoid cards which have lots of fees and charges.
Cheap monthly interest rates are disingenuous. In fact I would go as far as to say they are outright fraudulent. A monthly interest rate of 1.5 per cent might seem like a good deal, but in actual fact it adds up to 19.6 per cent APR, which is far higher than the average rate. So make sure you are not taken in by cheap monthly rates.
Some lenders may say they are rewarding you by increasing your credit limit. You should be careful not to see your new limit as a target for spending, and add to your debt burden for no reason.