Four Common Credit Card Mistakes And How To Avoid Making Them

Post by Sharat on May 13, 2009 · Under Featured Articles, Hints and Tips, Personal Finance, Self Help, comment, credit cards, interest rates, loans · Comment

Credit cards offer a great way to buy things you could not afford immediately and sometimes for people who don’t want to carry debt they offer a great mechanism. For whatever reason an individual uses credit cards, here are four commonly made mistakes and how to avoid them.

(1) Negative payment hierarchy

Negative payment hierarchy is a technique used by card issuers to ensure that the debt which carries the least interest on a credit card is paid off first rather than the debt that costs the moth.

For example a card holder who opts for a zero interest balance transfer card and transfers the balance of an existing card to their new card, will find that should they make a purchase on that card and then make a payment on it, the card issuer will use the payment to pay off the debt that carries no interest, whilst the purchase which is racking up the usual rate is left unpaid.

How To Avoid It

There are three ways of avoiding this trap. The first being using a different card to the balance transfer credit card for making new purchases and making sure that the purchase is paid off before the interest free period on the second card expires.

The second method is to choose a balance transfer deal which offers interest free periods on new purchases that last as long as the balance transfer offer period as well, which means there is no portion of debt which is accruing higher interest than any other on that particular card.

The final method is opting for a credit card which offers positive payment hierarchy, a card which lets the borrower pay off the most expensive debt first. (these are few and far between for now)

(2) Incurring Harsh Penalties For Minor Mistakes

Zero interest balance transfer deals are not hugely profitable deals for lenders, though the borrower is charged a percentage to transfer the debt to a zero interest card, lenders look for other ways to generate their profits, and imposing harsh penalties for minor mistakes.

Missing a payment, making late payment or exceeding the available credit limits all give the card issuer the ability to impose punitive costs on the borrower. Minor mistakes can sometimes have the effect of eliminating any benefit that the borrower receives from a zero per cent balance transfer and borrowers should be careful to avoid them.

How To Avoid It

The easiest way to avoid defaulting is by setting up a direct debit for the minimum monthly payment (obviously for borrowers who can afford it, perhaps more, so that less interest charges are paid over time should the debt be carried beyond the initial interest free period ).

(3) Not Keeping Track of APRs creeping up

Despite official interest rates all over the world falling to in some places, multi decade lows, many lenders have quietly been increasing the interest rates they charge to their credit card borrowers.

How to avoid it

Borrowers should be vigilant and should keep an eye on their statements, should they find that interest rates are edging up then they should switch cards.

One way to ensure that APR’s remain low is borrowers should consider taking out a lifetime balance transfer credit card. Essentially, these cards offer a low rate of interest for as long as it takes to clear the balance.

For total rate consistency and peace of mind, choose one that offers a fixed APR, rather than a variable one.

(4) The minimum payment trap

In recent months, several card providers have reduced their minimum monthly repayment levels without explaining to their customers what this means for their debt.

Lenders are not being altruistic when they lower the amount borrowers are required to pay, what they are doing is seeking to extend the term of the loan which results in a longer period the borrower is in debt for and ultimately increases the amount the borrower ends up having to pay as interest.

How to avoid it

If a card issuer or lender reduces the minimum monthly payment (or even if it doesn’t), borrowers should set up a standing order to ensure you’re paying as much as you can possibly afford every month.