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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 The withdrawn application will still show on your credit file and could damage your chances of getting another competitive deal.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
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.

Member

However did we manage before Credit Cards ?

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.

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.

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.

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.

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.

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.