Despite the base interest rate falling to 0.5%, the average credit card rate has risen by 0.5% in the past year. Some have risen far more, warns Sean Poulter in the Daily Mail. Customers with cards backed by the Royal Bank of Scotland, for example, have suffered rate increases of 4%. Other providers, such as MBNA and Alliance and Leicester, have cut the interest-free period and the time you have to pay your bill. So how can you avoid being hit?
First off, try to clear your credit-card balance in full each month, ideally by direct debit. Make sure the payment leaves your current account five working days before the credit-card balance is due. That way you’ll avoid late payment interest or even the withdrawal of a low promotional interest rate. And check your statements regularly to make sure the payment date hasn’t changed.
If you can’t afford to pay your balance in full, switch to a 0% balance transfer deal so that your debt won’t grow as you pay it off. But watch out for the balance transfer fee. These have risen in the past year and now typically sit between 3% and 5%. The best 0% deal available is with Northern Bank (NI) Visa, says Which? Money. There is no transfer fee, but clear the balance quickly as it only offers a 0% rate for five months. For slower payers the best card on Which? Money’s table is the Virgin Money credit card. It comes with a 15 month 0% period, but a 2.98% transfer fee.
Another sneaky fee is the charge for withdrawing cash on a credit card. This is best avoided as the interest rate is usually much higher than for card purchases and it kicks in the moment the cash is in your hand. Egg, for example, has just put up its minimum cash withdrawal fee to £5. That’s before you are hit with a 22.9% interest rate.
Also be careful when spending on a credit card with an outstanding balance. Most credit cards operate a “negative payment hierarchy” – your repayments clear the cheapest debt first. So if you have an existing balance on a 0% transfer deal, but then purchase something else, the new amount will accrue interest at the card’s full purchase rate until your payments clear the 0% balance completely.
So, if you’re struggling to clear a large credit-card debt, the best bet is to avoid further spending. Otherwise, try having a separate card for new purchases, or choose a card that offers 0% on both new purchases (for a set period) as well as balance transfers. The Virgin Money card offers 0% on purchases for three months alongside balance transfers. However, forget withdrawing cash on a card with a 0% deal, as it will accrue a hideous amount of interest. For example, a Virgin Money credit card charges interest on cash withdrawals at a rate of 27.9% until you have cleared all your other outstanding debts. Ouch.