Money Watch – Personal Finance Blog

Although I take an active interest in personal finance, I’m far from what I’d call an expert on all money matters, so I thought I’d start to enlist the help of some more knowledgeable people in order to answer some questions I have.

In this first post in our new “ask the expert” series, I spoke to Lyndsey from Credit-Card-Comparison-Online.co.uk and asked her a few questions about the credit card industry:

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1. In your 4 years of running Credit-Card-Comparison-Online.co.uk, what changes have you seen to the credit card industry?

I think a heightened level of knowledge and increased awareness of credit cards has been the main change over the last 4 years.

Guidelines and regulation changes on credit cards has forced lenders to be more open with the interest rates and fees charged, as well as the clauses in the terms and conditions of the borrowing.

One of the main changes in the way credit cards are advertised now is the introduction of the ‘summary box’, which all lenders must show alongside the full terms and conditions. The FSA (Financial Services Authority) also changed the way credit cards – and all other financial products – could be advertised. Including many ‘print’ changes such as APR’s must be in a font 1 and a half times bigger than any other print on the page.

All these changes have really opened up the credit card industry. Credit card products have become much more accessible to people in terms of really understanding the offers and actually making them work for the benefit of the cardholder and not just the lender.

Credit cards are really quite interesting financial products. They are quite unlike any other borrowing, and the complexity of the offers and the way they work can actually be used to the cardholder’s advantage – instead of just being a way for the credit card company to confuse and make money from the customer.

As the industry has opened up over recent years, people have become more and more aware of the ability to utilise credit cards as a means to save and even to make money.

And as people become more financial savvy and know how to ‘play the game’ as it were, credit card companies have had to follow suit. And while they still do all they possibly can to swindle us out of cash – they have also had to keep the offers we can use to save and make money very competitive.

2. What effect has the credit crunch had on the credit card market?

Credit cards are really quite a low-risk product for a lender, certainly in comparison to mortgages and loans.

The credit crunch really hit the mortgage sector first, and has hit the mortgage sector the hardest too.

In a way, a lot of banks seem to have turned to their credit card products as a way to keep their heads above water as many banks have had to withdraw mortgage products and even withdraw from the mortgage marketplace altogether.

While lending criteria has been tightened up in pretty much all sectors, the level of competition between banks and the amount of competitive offers available on credit cards has not reduced at all – in fact, only recently the longest 0% balance transfer offer has been stretched to a record 16 months by Capital One.

Few lenders have removed credit card products, the offers available and the competition between lenders to have that ‘best buy’ offer has – if anything – increased.

While there may be a case that application criteria has been put up a few points on the credit checking systems, the abundance of credit card offers has only increased and many lenders are still offering credit cards to people with bad credit ratings.

3. One common trick card providers use is to use a payment hierarchy, where any repayments made by a customer pay off the cheapest debt first, which can mean they end up paying more interest without realising – are there any other tricks do we need to look out for when selecting a credit card?

The ‘allocation of payments’ clause as you mention is a very common – and fairly recent – method of stitching up cardholders and has become a substantial way for lenders to make money back on their 0% offers.

Cash withdrawals are another transaction to really think about before using a credit card. One of the main reasons for this, apart from an often dramatically higher rate of interest and a handling fee is that there is no interest free period on cash withdrawals.

So, not only will you be charged the higher rate of interest, you’ll get charged it from day one – even if you clear your balance off in full each month.

And again, as a ‘higher rate transaction’ – the allocation of payments clause will almost always list cash withdrawals last. So you’ll have to pay back all your purchases and all your balance transfers before you can even pay back a penny of a cash withdrawal.

Using a credit card abroad can be another costly mistake too. If you withdraw cash abroad – you pay fees twice; you pay a cash withdrawal fee and get charged a cash withdrawal rate, and you also get charged a foreign transaction fee too, which is often around 2.75% – and recently some lenders have been pushing this up to nearer 3%.

Of course, with this new found competition to win over the more financial aware consumer many credit card products are being launched with various fees waived – such as cash withdrawal fees and use abroad fees.

The best advice is always to simply think about what and where you’ll use your credit card most – then choose a card that offers the best deal for that kind of usage.

Credit-Card-Comparison-Online.co.uk offers a range of different comparison tables allowing you to see exactly which credit cards offer the best rates and fees for an array of usage types.

For use abroad: http://www.credit-card-comparison-online.co.uk/use-abroad/default.asp

For cash transactions: http://www.credit-card-comparison-online.co.uk/cash-advance/default.asp

For combined 0% balance transfer and purchases – to avoid the ‘allocation of payments’ clause if you want to transfer a balance and spend on a 0% credit card: http://www.credit-card-comparison-online.co.uk/0-balance-transfer-purchase/default.asp

4. 0% balance transfers without fees are rare these days – is it still possible to find them, or have they died out completely?

They are very rare, and when they are available they are only on offers of 6 months or less.

Balance transfer fees are not going to go away, and when you compare the savings of paying a fee and getting 0% for 15 – 16 months, or avoiding a fee and getting 0% for just 6 months – the savings made in interest charges actually outweigh the cost of the transfer fee.

Of course, this does depend on the individual. If you can pay off your balance in 6 months or less then of course it is worth searching for a fee-free deal. But if it’s going to take you longer than 6 months you would certainly save more money overall by paying a fee and choosing the longest 0% period you can find.

There’s a very good breakdown of cost / savings calculations in our FAQ “Which is better a no fee balance transfer or a 0% rate?” – http://www.credit-card-comparison-online.co.uk/faq/no-fee-balance-transfer/no-fee-or-0-rate.html

5. Finally, is there anything you’d like to see happen in the credit card industry – any innovation in products, regulation etc?

I think everyone would like to see cheaper rates and less – or no – fees. However, credit cards are borrowing money at the end of the day and the lender has to make something back somewhere along the line.

I think a more honest and open approach to advertising would certainly be at the top of my list. Some providers are still advertising cards without fully explaining the details of what they are offering.

For example, while this method is in limited numbers, there has been a few 0% balance transfer deals offered with a ‘required spend’ of a certain amount on a much shorter 0% purchase period.

In other words, you have to spend say £200, to get the full length of a 0% balance transfer offer.

Allocation of payments clauses are bad enough when cards come with 0% balance transfers for 12 months, and 0% purchases for 3 months.

But when cardholders are actually forced to spend on the card to get the full 12-month 0% balance transfer deal – this kind of offer is slightly over the line as far as I’m concerned.

There should be more done to inform customers that credit cards are really only good for one or two things – and are not great for all uses as they are so often advertised as.

A rewards based credit card for example, is not good for both earning rewards and using a 0% balance transfer – but cash back or rewards credit cards so often come with a tempting 0% balance transfer deal.

If credit card companies are not willing to create cards and advertise them as good for just one thing (which is unlikely and it’s the misleading uses where they make their money). Then more should be done to help people feel more comfortable about carrying more than 1 credit card.

Having enough credit cards to keep all types of uses as cheap as possible, and to earn the best rewards is the best way to go – even if that means carrying 5 pieces of plastic.

There are even online tools such as Egg’s Money Manager (I wouldn’t be without it – Ed)that allows you to see all of your finance accounts – from all banks and building societies – in one place. Making it incredibly simple to juggle a number of cards to keep rates and fees at their lowest.

However, it mustn’t be forgotten that the only real way to keep credit cards cheap is to keep them paid off in full!

And of course, a ban against store cards too!

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I’d like to thank Lyndsey for her time and comprehensive answers. If you’ve got a question about credit cards, or any other financial matter, please get in touch and I’ll try to answer it either myself or in a future “ask the expert” post.

Also, if you’d like to be featured as an expert on a subject, please also feel free to get in touch.

photo credit: epidemy