CREDIT CARDS: IT AIN'T WHAT YOU PAY, IT'S THE WAY YOU REPAY IT!

Here we are, approaching the end of February already and if like me you’ll be feeling like Christmas and New Year was a lifetime ago and all the good intentions have gone by the way. Well now is the time to get back on track and over the coming months I will be providing some helpful tips to help put you in control of your finances and helping alleviate financial stress.

As the credit crunch and the expense of Christmas hits all our wallets and purses, it’s more important than ever for us to understand our finances, especially the murky world of credit cards or as I prefer to call them, DEBT CARDS.

Just last week I was reading an article by Martin Lewis of moneysavingexpert.com, I was astounded to learn even more about how these companies treat their customers. Two important areas jumped out at me, minimum repayments and even more so, the allocation of repayments.

Politicians are in the process of trying to tackle the problem and bring more regulation to the various companies but while we wait to see if they can put accountable measures in place, let me share some tips to help you get in control.

MINIMUM REPAYMENTS

By paying the minimum payment each month you are making little or no progress into reducing the balance. If a 20-year-old makes minimum repayments on a £3,000 17.9 per cent credit card debt, they'd be 61 when it would be clear, having shelled out £6,300in interest.

Monthly minimums are deviously set at two to three per cent of what you owe. That barely covers the interest cost, so the repayments hardly touch the actual debt.

How to beat it? Obviously by paying more, yet many say that is unaffordable. If so, fix your repayment at a set amount and don't let it drop as the debt does. In the example above, the first month's minimum is £60. Fix your repayments at that, and providing you don't borrow more, you'd be clear in seven years, costing £2,100 interest.

The exception: If you have more than one card, pay minimums on all but the one charging most interest. Shove every penny at clearing that as it's growing quickest. Once it has gone, switch to the next costliest.

The Government plan to implement ‘recommended repayments’ where you pay enough to repay the debt within 3 years.

IT AIN'T WHAT YOU PAY, IT'S THE WAY YOU REPAY IT.

Every card firm - except Nationwide and Saga - uses the following legal profit-bolstering system called "allocation of repayments".

Step 1: They charge different rates for different uses. So you pay higher or lower interest depending whether you spend, make balance transfers or withdraw cash.

Step 2: They suck people in with ONE cheap rate. For example, they offer 0 per cent balance transfers for shifted debt, but 20 per cent on spending.

Step 3: They tempt you to spend. While spending at 20 per cent they offer Airmiles, reward points, cashback to entice you to do it too.

Step 4: WHAM! You're trapped! Balance transfer AND spend, and your repayments are automatically "allocated" towards clearing the 0 per cent balance transfer debt - meaning you can't repay the costly spending debt until that is cleared. So it sits there relentlessly clocking up interest.

HOW TO BEAT IT: If a card's got cheap interest for one type of transaction NEVER, ever, ever use it for anything else. Shift debts to 0 per cent cards but DON'T spend on them.

The real cost: Devastating. Spend £2,000 (at 15 per cent) on a card you've already shifted £2,000 to at 0 per cent for 16 months, and with £200-a-month repayments, the interest by the time it's clear is £480. Spend on a separate card, at the same rate, and you could focus your repayments at clearing this costlier debt first. Do that and the total interest almost halves to £280.

In fact, even using a card at a higher interest rate for spending is cheaper.

The Government's options include legislating to ensure costly debts are cleared first.

SUMMARY

I frequently use moneysavingexpert.com to calculate repayments and the time they will take to clear balances. If this is something you would like to discuss with a view to putting a plan in place to tackle your cards, why not take advantage of a free ’Financial Coaching’ session with one of our advisers

Whether you want tips on taking emotional control of your finances, choosing goals and planning how to achieve them, paying off Christmas debt, sorting out pensions, investing, spending or simply living within your means, this is a genuine offer for you.

This normally takes about 30 minutes either face to face or over the phone. I can meet you in my office or at your home at a time that suits you. By working with a money coach you'll learn to take full control of your money - something we know that all our clients find ultimately motivating and empowering.

If you have any questions, please feel free to call me on 02890 769 769 or email paul@viewfinancialservices.co.uk

The contents of this blog are believed to be correct at the date of this publication (February 2010). However, all the information and figures are subject to change and you should always make enquiries and check details and where necessary seek legal advice before entering into any transaction.

The information in this blog is simply my opinion and does not constitute financial advice. You should seek professional advice tailored to your needs and circumstances before making any decisions.

The Financial Services Authority does not regulate Credit Card advice
Registered in Northern Ireland No. NI070072. View Financial Services is an appointed representative of Personal Touch Financial Services Ltd which is authorised and regulated by the Financial Services Ltd.