Credit Card Charges - What they don't tell you
Credit card companies love offering a low purchase interest rate. Why? Because it is usually paid for by a variety of hidden charges that can easily add up, but can be very difficult to avoid.
Payment Allocation
One of the cheekiest ways credit card companies get extra charges out of their customers is via the system they use to decide which bits of your credit card balance to pay off first, called 'Allocation of Payments'. Basically, it usually means that the stuff they make most money on is paid off last, and the stuff they make little to no money on is paid off first. This means that if you have a £500 interest free balance from a balance transfer, but you spend £100 at the normal purchase rate, you'll carry on paying interest on the £100 unless all of the £500 is paid off first. If you only make the minimum payment, this may take years, meaning you're paying interest on the £100 for all that time. It also happens in the case of payday loans, but credit cards involve more hidden charged than payday loans.
Interest Free Credit Periods
Many people will sign up to a particular credit card based on the length of the interest free credit period, either for purchases or balance transfers from another card. Balance transfers usually have a longer interest free period, as the card companies have a guaranteed credit from the start. The first way they make money from this is to charge a balance transfer fee, of around 2% to 3% of the balance, which can add up to a lot if you're transferring a few thousand pounds. This is added to the total balance you owe. The companies are under no obligation to remind you of when the free credit period ends, and when it does, the interest rate can be as high as 20% to 30% plus. If you carry on making the minimum payments once the interest starts, its likely that your payments won't even cover the credit charges, meaning the debt will only go up. In the long run, you might even have been better staying with your original card if it had a lower rate, even if you had to find other means of making the monthly payments on time. This is the reason, why people prefer payday loans instead of owing a credit card.
Monthly Payments
The most important thing to be aware of if you have a credit card is the need to always make sure you meet the monthly payment. If you don't, your credit score can be badly affected making it harder to get other types of credit in the future. Not only this, but the credit card companies will charge you a fee for missing the payments - they'll then add this to your balance and charge you interest on it along with everything else. This may be one of the things that come last in payment allocation, so it can ruin any 0% offer you may have too, in the way explained above. This means it can be cheaper overall to meet the monthly payment by using other sources of credit.
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