Three ways to cut credit card costs

Moneyextra's figures show the average balance transfer value creeping ever upwards. As of April 2005, the average amount people were looking to switch from one card to another was £3,527, up nearly 23% on the average levels of balance transfer being sought in April 2004. It is fairly safe to assume, therefore, that most of us are aware that one of the obvious ways of lowering the cost of our credit card habit is by moving to a new credit card with a lower rate of interest than the one you are currently paying.

"Interest-free" sounds very attractive doesn't it? But it may not actually make as much sense as you might think. The credit card market is changing. There are fewer zero-per cent deals around than there used to be and they tend to be for only 6-9 months now rather than 9-12 months as previously offered. What's more, the "go-to" interest rate can be quite eye-watering - sometimes more than double the rate of interest on offer from cards with low standard rates.

Quite simply, unless you have the discipline and the wherewithal to pay off an outstanding balance within the interest-free introductory period, it may not be worth taking out such a credit card. You might be better off financially taking out one that has a consistently low interest rate right from the start.

You may feel that I am being unduly pessimistic about your abilities to manage your credit card debt and that, if it is not paid off, you can just as easily hop onto the next interest-free deal. Maybe you can, but the facts are, according to a recent survey, that most people don't arrange their new card before their existing interest-free deal expires. Thus they end up paying high interest before being able to switch.

Rule number one: unless you run your credit card like a precision military operation (either beating down your balance or preparing your line of retreat to a new card in timely fashion) you may be better off switching to a card that charges a rate of interest that is straightforwardly lower than the card you already hold.

Having chosen the credit card you are going to use, you must remember to use the power of the interest-free period properly. Now I can already hear large numbers of people saying, "Hang on, you said consider a card that doesn't have an interest-free period." Actually no; what I said was consider a card that didn't offer an introductory interest-free period. Virtually all credit cards offer an interest-free period of some kind.

The importance of timing your spending

What you should get is a period of grace between your spending and the moment at which the spending has to be paid back. If you pay off what you owe then you end up being charged no interest on the borrowing for the period between the date you spend and the date you pay off the credit card bill. Time your spending correctly within your credit card billing cycle and you could end up with almost two months interest-free credit.

Of course, this only applies to those military experts who can time their assaults on the retail sector with the right precision. However, that doesn't mean that the rest of us shouldn't take the interest-free period into consideration. We should. You may be carrying a balance on your card now and, therefore, the interest-free period may not be of much immediate use (if you can't pay off your existing balance, you won't be able to pay off this month's spending either). However, once your balance is paid off, it is worth making sure that you have a card with an interest-free period (not all of them do) in order to minimise the costs of your future spending.

Thus, rule two: make sure you have a card that does offer an interest-free period between date of spending and date at which payment of your credit card bill is required.

Now to the topic of fees; you won't find a credit card that is fee free. What you should find is a credit card whose fees you dont have to pay provided you behave sensibly. The kind of fee I am talking about here is the late payment fee, the over-limit fee and the invalidation of any special deal you are on.

Make your payment outside the time limit stipulated by your credit card bill and your card issuer will charge you a fee, around £25 is fairly standard. Go over your credit limit and, 'ker-ching', another £25. Do one or other (maybe both) these things while you are in any kind of special interest rate period and, 'ker-ching', you'll find yourself being hit with the card's standard rate of interest on your outstanding balance as well for breaking the terms of your credit agreement.

Also, don't use your credit card as cash. Not only will you be stiffed with a high withdrawal fee by your card company, you will also find that interest is being charged on your cash withdrawal immediately - you will have no grace period unlike an ordinary purchase. Furthermore, not only will interest be being charged right away, with many cards it will be charged at a higher rate than that charged on purchases!

So, our third key rule: don't pay fees that you don't have to pay!

27 May 2005 © Moneyextra.com

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