The original proposition behind credit cards was pretty simple: use your card to pay for something, and either settle your debt at the end of the month or incur interest charges on whatever balance you carry over. Also you’d likely pay a small annual fee to cover the administration costs of the card issuer, but that was about as complicated as it got.
Over time, as the card market became more and more competitive, credit cards evolved into much more complex beasts, sporting all manner of features and benefits designed to lure new customers. Balance transfers, cash back, cash advances, rewards schemes…. the list goes on. At first glance, this seems like unalloyed good news for the cardholder – after all, who wouldn’t want more benefits from their card?
There is, however, a drawback to this increased sophistication, and that’s a dramatic expansion in the amount of small print you’re supposed to read and agree to before receiving your card. Of course, not everyone actually does this, something that the credit card companies know full well, and all this small print offers plenty of opportunity to impose various fees and charges without making it too obvious that this is going to happen.
Balance Transfer Fees
Firstly and perhaps most famously, there is the relatively new charge called the balance transfer fee. Although the introductory 0% period on the average card has got longer and longer over the last few years, the fee charged for each balance transfer has also crept inexorably upwards. Whereas only a few years ago there was no fee associated with using the transfer facility, the average now stands at around 3%, making large transfers fairly expensive.
Splash the Cash
Next up we have cash advances, credit card cheques and the like. These are charged at a higher rate than the standard APR of the card – and usually at a much higher rate. There will also usually be a percentage fee for each transaction on top of that. Suddenly, the facility to get cash from your credit card doesn’t look that attractive when yu realise that it’ll cost you up to 30% per year of what you withdraw unless you clear the debt quickly. The definition of a cash advance is also somewhat loose. Obviously withdrawing cash from a machine would count, but some banks also class online betting using the card as a cash advance and charge accordingly – fathom that one out.
Your Minimum Payment Is…
Lastly, we have the vexxed issue of minimum repayment levels. While not strictly a charge in themselves, they are nonetheless a very lucrative area for the card issuers. Where once the minimum you needed to pay each month was 5% of the balance, this has drifted down as low as 2% in some cases. While this may seem a good thing to the consumer – lower monthly bills are generally welcome – when you factor interest charges into the equation, it becomes clear that this is one of the most insidious practices around. A 2% payment on most cards will barely cover the interest being charged, especially if there’s a lot of cash advance debt on the account. Paying this little will basically leave your original debt all but untouched, and you’ll be caught in a cycle of merely meeting the interest charges for year after year.
So dramatic is the effect of reducing minimum payment rates that the government as forced the card issuers to make the dangers clear on every card statement they send out, and there is also speculation that payment levels will be forced upwards again by regulation if they continue to fall.
This is by no means an exhaustive list of the ways your credit card company will try to separate you from your money, but hopefully it highlights the need to keep an eye on the small print and terms and conditions changes that you receive through the post – or you might well find you’re being hit with new and unexpected charges.