/ Money

Why do banks have to play credit card tricks?

As a credit card user, it feels like the bank always wins whatever you do. I’m fed up with 0% deals, repayment systems and interest calculations that entice customers in and then hit them with unexpected costs.

Just for the moment, let’s put aside the fact that average credit card interest rates are still 35 times higher than the Bank of England base rate of 0.5%. There are far sneakier forces in play.

The interest trick

Most credit cards offer around 56 days interest-free if you pay off your bill in full. That’s great. However, if you don’t pay off your whole bill, interest on your shopping is usually backdated to the date of purchase, so you lose your interest-free period. This applies to all of your spending in the month, not just the portion that remains unpaid.

To make matters worse, if you don’t clear this month’s bill in full, you’ll enjoy no interest-free days on next month’s purchases either.

This applies equally if you have a 0% balance transfer deal and then spend on the card. For as long as your 0% balance lasts, you’ll usually get no interest-free days on new shopping. So although you thought you’d avoid these payments by taking out a 0% deal,  you’ll still have to pay interest on new purchases.

The direct debit trick

When I want to spread the cost of a credit card purchase, I set up a direct debit to make the minimum payment each month. But I also top this up by paying extra when I can.

However, I recently got a surprise when I made an extra payment to my card. Rather than taking it in addition to my direct debit, my bank knocked the extra payment off the direct debit amount they collected.

My direct debit was for around £30 and I made an additional payment of £20 before the direct debit was due to be taken. My card provider subtracted the £20, thus reducing my direct debit to just £10, keeping me in debt for longer than I wanted or had intended!

Interest rates and phone rates

That’s by no means the end of it – for a start, card providers are allowed to offer up to 49% of successful applicants a higher interest rate than the one advertised. To take one example, if you apply for the Play.com credit card from MBNA, your personal interest rate could be the advertised 16.9%, or 20.9% or 24.9%, depending on your credit history.

You’re left with a dilemma: accept the higher rate and pay more interest, or withdraw your application. The withdrawn application will still show on your credit file and could damage your chances of getting another competitive deal. This just doesn’t seem right.

Furthermore, if you try to call your card provider, chances are you won’t be able to call the 0800 number advertised to new customers – most use a potentially expensive 0845 or 0844 number for existing cardholders.

All of these tricks make me increasingly sceptical of the whole credit industry. What sneaky charges have you spotted? Should they be banned or is it down to us to do our homework?

Comments
Profile photo of chris
Member

Nasty banks
I won’t play with them – vote with your feet.

Member
Mikhail says:
12 December 2011

I have Amex cash back with APR 2.99% (till Aug’12), MBNA 6.5% APR (permanently) the highest APR I have is with Halifax 12.9%, but I pay my balance in full every month.

Profile photo of rarrar
Member

However did we manage before Credit Cards ?

Profile photo of Patrick Steen
Member

I’m noticing a tinge of sarcasm in that comment. I’m happy to say I don’t have a credit card and never have. Then again, I don’t own a house or a family to look after.

Profile photo of wavechange
Member

You did not have a smartphone until recently, Patrick, and within a year or so you are telling us about all the clever things that they can do. 🙂

Credit cards are fine as long as the full balance is paid by direct debit monthly to avoid high interest charges and you avoid using them when there is a credit card surcharge. Used carefully, they can help avoid overdrafts. Obviously, credit cards are unsuitable for anyone who tends to debt.

Profile photo of Patrick Steen
Member

Alright, alright. Well remembered. I am completely opposed to debt, so I’d hope I wouldn’t get into it. But I would be much happier to take out a credit card if the tricks explained by Martyn didn’t exist.

Profile photo of wavechange
Member

I agree about avoiding debt and it is sad that most students are forced to accept it as an inevitable part of their higher education.

What used to annoy me was the high credit limits on cards and the fact that the banks increased them without being asked. It makes sense to give new credit card holders a low credit limit and increase this only on request and if there is evidence that the card is being used sensibly.

Profile photo of Patrick Steen
Member

Oh, I’d forgotten about my student debt… so, yes I am in debt. There you go, I’ve just accepted it. But I hope not to get into further debt apart from student loans.

Profile photo of Martyn Saville
Member

I agree that the best way to deal with credit card tricks is to not have a credit card at all. However, for many people it’s their only option when faced with unexpected expenditure. All I’m asking is that those people know exactly what they’re agreeing to when they take out a card – too many people are caught out by sneaky T&Cs that most of us would also struggle to spot.

What I didn’t mention in this Conversation post is that I’d like to see a huge move towards community-based finance, whether that’s a credit union or a CDFI – credit card companies would then have a bit more competition, which might encourage them to improve their own practices.

Profile photo of wavechange
Member

One of the reasons I prefer to pay by credit card is because of the protection offered for transactions over £100. I have never made a claim and I do not know anyone who has, so I wonder if this protection is worthwhile or whether the terms and conditions make it difficult to get a refund. Has this been covered in a Which? report?

Profile photo of Martyn Saville
Member

Hi wavechange. We investigated credit card staff’s understanding of section 75 cover about a year ago, with relatively poor results for several big names: http://www.which.co.uk/news/2011/01/which-exposes-poor-credit-card-claims-advice-242512/

That shouldn’t put you off from putting in a claim though – the law is clear-cut on the issue (under the Consumer Credit Act), so the Financial Ombudsman will intervene if the card company is unfairly refusing to pay out. We think section 75 cover is invaluable. Here’s our guide: http://www.which.co.uk/consumer-rights/sale-of-goods/your-rights-when-paying-by-credit-card/

Profile photo of wavechange
Member

Martyn wrote: Furthermore, if you try to call your card provider, chances are you won’t be able to call the 0800 number advertised to new customers – most use a potentially expensive 0845 or 0844 number for existing cardholders.

This has annoyed me for years because calls to my card provider are usually lengthy affairs, although I now know how to avoid the need for some of the button pushing and speak to an advisor. Often the reason for a call is when an unfamiliar company is listed on the statement without reference to the retail name of the organisation.

I have now moved to a phone tariff that will let me make complaints without the need to worry about the cost of the call. I will still reprimand companies for using non-geographical numbers.

Member
Martin G says:
13 December 2011

one of the tricks that Credit card Companys do is to entice you in with a good rate or offer, then increase your limit. A few month down the line comes the whammy they hike the rate up to the cowboy rate of 28-30%. You do have the option to suspend the card and continual paying at the old rate. However they have not finished with you yet. When you call up to suspend the card they pretende to do you a favour by offering you a loan to pay off the card, but look carfully as you will be paying a good wack on intreast as the loan will be over long period. This has happned to me twice over the last couple of years the most recent being Virgin aka MBA. their rate went from 16.6% to 24.9%. this is not down to credit rating as I have excelent credit history and a very good credit rating according to all credit rating agenties. This I can only see as the Virgin/MBA looking for customer they belive they can milk for more money. I will not take their bait and will suspend the card at the current rate and look to pay the card off. I wish Which would take these cowboys to task. So far the only credit card account I have opened that has been playing by fair rules has been Barclaycard. They seem to have a good customer policy so far.

Profile photo of Martyn Saville
Member

Hi Martin. We’ve heard from lots of people about seemingly arbitrary rises in APRs and are looking for the best way to investigate this. You rarely seem to hear about falling APRs! Part of the problem is that there are rules over how many new applicants must be offered the advertised rate, but not over existing customers.

On the plus side, under new rules that came in at the beginning of this year a card provider isn’t allowed to put your APR up in the first year of holding the card, unless it puts every customer’s rate up by the same amount. This does offer some stability, but you’re right that more needs to be done.

Profile photo of wavechange
Member

Thanks for posting the links, Martyn. I don’t remember reading the article.

Although I have never pursued a claim with my credit card provider it’s good to know where I stand.

Member
Brian Cox says:
16 December 2011

At the risk of sounding smug, my credit card company pay ME month after month! I spend around £600.00 p.m., using my BT card to pay for just about everything. I always pay it off in full, via DD, and get around a fiver credited to my BT bill each month. As I’m on the Light User tariff this means I don’t pay a bean for my telephone service, sometimes actually in credit. Gives a whole new meaning to “Credit Card” doesn’t it?

Profile photo of wavechange
Member

You deserve to sound smug, Brian. I would like to see the direct debit payment as the default payment method, which could protect many people from the extortionate charges.

Member
ann b says:
12 March 2012

CC statement arrived this morning. Hotel mishandled a transaction and refunded the amount to my account. These two transactions were concurrent. Interestingly, the refund actually appears on my statement before the debit. The amount were the same in Euros but I was left out of pocket by the conversion fees etc.

This has been an issue in the past and I have always had the amount refunded when I queried it with barclaycard. At this point, surely it would be more ethical for them to do this automatcially rather than waiting until I pick up the phone? I can only assume that they make millions of pounds of extra profit annually by allowing the status quo to continue.

I also noted that the exchange rates for debits and refunds on my barclaycard visa were different. I queried this via a call centre and had to be transferred to customer relations for an anwer. Even at this point it took some persistence and very direct questioning on my part to get confirmation of what was clearly written on my statement. They tried to fob me off with fluctuating exchange rates. it was not until iread the five directly before and the five rates directly after the refund that I was finally told “yes, the rates differ”. £0.81 to the Euro as opposed to £0.86, quite a difference.

The moral of the story – check your statements and question poor practice. it pays to do so.

Profile photo of richard
Member

The reason I like my credit card from First Direct is I can access the account free on-line – So I can and do check the items paid for several times a month. I have a fixed “pay by” date – the 4th of the month – when I check the balance and pay it off completely. As I buy virtually everything by credit card – I have an automatic record of what I bought – makes budgeting very easy.

Usually I’ve found e-mails are answered quickly and accurately so very rarely need a phone call. but even these are to a UK call centre.

I did know of the so called “tricks” as they are in the conditions of use – not tricks at all – you do read them don’t you?.

So far only two problems in 21 years – one was a fraudulent payment – First Direct reimbursed me instantly and a time when I paid over £1000 for an item when they refused to pay initially as it was completely outside of my buying habits.- A quick phone call sorted that out and the purchase was cleared – somehow I prefer that action to finding that someone had falsely removed £1000 from my account.