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Credit Cards - Disadvantages
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  • Number 1 problem - Interest Rates
    The rates charged of normally between 15% and 40% make borrowing money via a Credit Card extremely unattractive and expensive. See - How to reduce your monthly interest bill
  • Interest is not always calculated in the same way
    When comparing interest rates most people look at the APR (Annual Percentage Rate). However there are ways of circumventing APRs whereby it is more expensive to borrow on a Card that charges interest at 12% rather than one which charges 15%. See How Credit Card interest is calculated

  • Low minimum repayment levels
    These used to be 5% but now have reduced to around 2%. Is this the Credit Card companies trying to help some of their indebted customers or a cynical move to generate more profits? The answer of course is the latter. If you pay 5% a month your debt is repaid in a shorter time than if you pay 2% per month which will take correspondingly longer to repay.

  • Credit Card Cheques
    Pure evil. They encourage you to spend more at very high interest rates which is why the credit card companies throw them around like confetti. The only strategy worth following with these is to rip them up as soon as they arrive in the post. Often these cheques are even more expensive to borrow on than spending on your card. They also charge interest from the time the cheque is used and often levy a handling fee of 2%. Overall these cheques are probably in the top 3 of the worst products in the Personal Finance world and it's no surprise they are about to be banned.

  • Sometimes buying goods/services is more expensive
    Ever booked a flight using plastic? Pay by a Debit card and it is one price, pay by a Credit card and the price is usually 3% higher.

  • Payment Protection Insurance (PPI)
    Often aggressively pushed at every available opportunity by your Card provider. The idea behind this insurance is that your bills are paid if you are unable to work because of illness or an accident. The problem with this insurance is twofold, it's incredibly overpriced and many claims are refused. Plus, you'll often be sold it when you don't even qualify, ie you're self-employed or on a fixed work contract. See What is PPI Loan insurance and how to get a cheaper quote.

  • ID Theft Insurance
    Again, in theory not a bad idea but the financial services industry often takes a good idea and then ruins it by grossly overcharging. Sadly they know many of their customers are uneducated when it comes to financial products plus too trusting of financial institutions. .

  • High Credit Limits
    Card companies often offer far too much credit to people knowing full well that many of them can't be trusted not to overspend. A limit of £1,000 - £2,000 is more than enough for most people but higher limits of £7,500+ seem to be more the norm, even for people earning less than £25,000 a year. If you can't trust yourself with a ;large credit limit then call your provider and demand it's lowered.

  • Spending when abroad
    It's the fees that can make this so expensive. You can be charged around 2.75% for the FX loading fee and then a handling fee of 2.5% if you draw money out from a cash point machine or bank. If you use your card a lot abroad the fees can mount up very quickly. But they can all be lowered if you get the right Card.

  • Dynamic Currency Conversion (DCC)
    It appears that when we take our Credit Card on holiday we are prey for anyone and everyone. The nasty Dynamic Currency Conversion is a prime example. If you go to a restaurant or shop, occasionally you will be offered the option of paying in Pounds rather than the local currency. The retailer then adds its own handling fee on top which will make the bill even more expensive than if you'd paid in the local currency.

  • Annual Fees
    Most card don't charge any fees (as long as you pay back the full amount every month) but they are starting to creep in for some cards. But competition is always ferocious in the Credit Card world so if your provider wants to charge a fee consider taking your business to one of the many that won't charge.

  • Low Usage Fees
    If you haven't used your card for between 6-12 months there is a chance that you could get penalised for around £10 - £30 per year. These are called inactivity fees. Avoid them by using your Card once every few months.

  • Expensive to withdraw cash
    Firstly higher rates of interest are charged for cash withdrawals than traditional spending on a Card. Secondly, interest is charged from the time the money is withdrawn plus a 2%-3% fee will be charged as well. Don't use your credit card to withdraw cash, use a debit card instead.

  • No proper definition of a Cash Withdrawal
    If you use your credit card to make an electronic money transfer (like Western Union), fund a pre-paid credit card, or use for online gambling, those are treated as a cash withdrawal and therefore extra fees will be charged plus a higher interest rate.

  • Funds must be cleared by the payment due date
    Some people forget that when you pay a credit card bill the money won't clear into your account for up to 5 days (usually 3 days). Even if you pay in cash at your local bank it still takes the same amount of time. So always aim to pay your bill a minimum of 1 week before the payment due date. See Secret 8 - 10-30 minutes a week is all you need to be financially organised - which is one of this site's 10 Secrets to Good Personal Finance.

See also

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