Even though many card companies are seeing their profits drop and their bad debts skyrocket, the market is still very competitive, and companies continue to offer "best buy" deals. Andrew Britchford, a credit card analyst at Moneyfacts.co.uk, talks about how people can avoid some of the most common problems with credit card deals and get the most out of the ones that are out there. It can be harder than you think to choose the right card.
"In addition to the rate, there are many other things to think about when choosing a credit card. These include introductory offers, balance transfer deals, fees, incentives, and, if you read the fine print, the number of interest-free days, the order of repayment, and how the interest is charged. These things can quickly reduce the benefits, even if they seem to be worth a lot.
"Consumers who want a card that can be used for many things may find it hard to find one that has competitive terms for all of the account facilities. Providers often offer a competitive deal on balance transfer rates, introductory or standard purchase rates as a "carrot" in the hopes that the customer will use other services, which is often how they make money.
"The order of repayment is a key factor that is not often thought about. This means that if the consumer has different parts of their bill that came from different sources, like cash advances, balance transfers, or purchases, and they make a partial payment, what gets paid off first? Does it pay back the first transaction in order of when it happened or how much it cost?
"The current offer, which is said to be only a test at the moment and can be found online through the Capital One platinum card, is a great example of how the order of payments can change an offer. The new card has 15 months of 0% interest on balance transfers, which is the best deal on the market. However, the seemingly small requirement that you have to spend GBP100 on purchases before July 1 makes it almost impossible to get this deal in full. By encouraging people to use the card for more than one thing, consumers could lose their 0% deal.
"The catch is in how the money is paid back. A good consumer who buys something for GBP100 and then pays it off in full on their next bill probably won't have to pay any interest. But this isn't true. The GBP100 payment would go toward paying off the balance transfer, while the GBP100 purchase would keep adding 15.9% interest until the total of the balance transfer and the balance is paid off in full (assuming no further transactions).
"This may not seem like much, but when all customers pay it, and sometimes on much larger amounts, it adds up quickly. With a 2 percent balance transfer fee that has no limit, this could be a good place for lenders to make money.
"If we look at the worst-case scenario, which is a customer who, in their first month, transfers a balance of, say, GBP 2,000 and then spends GBP 2,000, we can see what could happen. When they get their first bill, they pay back £2,000 to clear what they think is their purchase spend. But they will actually pay off their balance transfer, leaving the customer with a GBP2,000 balance that is accruing interest and a balance transfer deal that is going away.
"Capital One is not the only company that handles payments this way. In fact, only HSBC, Nationwide BS, and Liverpool Victoria use the "customer-friendly" option and pay back the most expensive items first. But it's important to know that other companies don't try to get you to buy things with a card that's meant for balance transfers.
"Consumers should take the time to fully understand what they are getting into before agreeing to something. Since there are so many cards on the market, they should be able to find one that fits their spending needs. Trying not to use the same card for purchases and balance transfers at the same time will help consumers save the most money."
