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The New Credit Card Booby Trap
Credit card companies have a new trick to get cash out of their customers. We explain what it is and how to avoid it.
A major credit card trap is due to shut down. A few months before the general election, the Labour government got the credit card industry to agree to shut down a couple of the devious tricks that cost cardholders money.
The biggest change is that, from January 2011 (or September 2010 in some cases), repayments to our credit cards will go towards the most expensive debts first.
That means if you have made a purchase that costs you 16% interest and you have got a balance transfer on your card that is currently a 0% deal, any repayments you make will go towards the more expensive purchase. Previously, most cards would allocate your payments to the 0% deal first, so that the card provider could earn more from your expensive debts longer.
The closure of this nasty trick is going to save cardholders a small fortune. To that end, you may have read many reports about how there will now be a fair order of repayments. If only it was that simple.
Squeezing the pounds out of customers
Ever-suspicious (that's my job) I have considered what is coming next and I have worked out what the next credit card booby trap is going to be. Indeed, I have established that from 1 September 2010 this trap will already be costing some of you money in a very underhand way.
MBNA has its own credit cards and also issues cards for dozens of other companies, such as Virgin Money. From September, MBNA will switch to paying off the most expensive debts first, four months before agreed with the government. However, I asked it how it will allocate repayments when two 0% deals are running simultaneously and its answer was not good.
Imagine you have taken out an MBNA credit card that is 0% on balance transfers (plus a small fee) for 12 months and 0% on purchases for three months. Let's say that you immediately transfer a balance of £1,000 and make a purchase for £1,000 too. During the first three months you have two deals of 0%.
MBNA tells me that, from 1 September, any repayments you make during the time both 0% deals are live will not be allocated to the shortest deal.
Instead they will go towards the transaction that will revert to a higher interest rate. This means that it can charge a nominally higher interest rate on balance transfers than on purchases in order to direct your repayments to the longer 0% deal.
Hence, if you were to pay three equal instalments of £333.33, you'd find that it was the balance transfer that you cleared when your 0% purchase deal ends. You will then have a £1,000 debt that is costing you a very high interest rate.
I don't know how many times the word 'sneaky' has been used in connection with credit card small print, but it's a good word for it. That is why the problem of the order of repayments will live on at MBNA despite government intervention, albeit with a reduced impact. Perhaps other card providers will take the same line.
It is not all bad news
No card provider uses every possible booby trap, which is handy as I've counted more than two dozen different tricks. It's widely known that Nationwide's credit card already pays off the highest interest rate first, but it has happily confirmed today that it will also continue to pay off the shortest 0% deal first, in contrast to MBNA.
Saga and some other companies offer deals of equal length that revert to the same APR afterwards, which makes this card trick impossible to pull off. If you have a nine-month balance transfer deal and a nine-month purchase deal running simultaneously that both revert to 16% afterwards, it makes no difference which type of transaction the card provider pays off first: it will cost you the same.
Barclaycard has told me today that it will not be following MBNA's footsteps. From January 2011 it is going to allocate payments to the shortest 0% deal first, when a customer has used two different 0% deals.
To be safe, try clear your entire card debt before either 0% deal ends or - better yet - use a credit card for one type of transaction only.
Unfortunately, I don't have time to chase every card provider and press them for a direct answer. What's more, taking Barclaycard as an example, this information isn't displayed in the neat little Summary Box of key terms that all card providers are obliged to show us.
What I can do is list all the cards I have found that are issued by MBNA (correct as of December 2009), which will be using this trick:
* AA
* BikeCard
* BMF
* BMI
* breakthough breast cancer
* british heart foundation
* Cheshire Building Society
* Childline
* Football clubs
* homebase
* ICICI
* MBNA
* Melton Mobray Building Society
* Norwich & Peterborough
* PADI
* Play.com
* Rugby League clubs
* Ryanair
* Ski Club GB
* Star trek
* Sonycard
* Toys R US
* Unicef
* Virgin Money
* Virgin Atlantic
* World superbikes
* WWF
When MBNA announced its first set of changes will occur next month, it said: "This [change] is in the interest of our customers and they should be benefiting now." I hope in the same spirit it reconsiders how it will allocate payments when there are two 0% deals running at once.
Reference:
Nate
Credit card companies have a new trick to get cash out of their customers. We explain what it is and how to avoid it.
A major credit card trap is due to shut down. A few months before the general election, the Labour government got the credit card industry to agree to shut down a couple of the devious tricks that cost cardholders money.
The biggest change is that, from January 2011 (or September 2010 in some cases), repayments to our credit cards will go towards the most expensive debts first.
That means if you have made a purchase that costs you 16% interest and you have got a balance transfer on your card that is currently a 0% deal, any repayments you make will go towards the more expensive purchase. Previously, most cards would allocate your payments to the 0% deal first, so that the card provider could earn more from your expensive debts longer.
The closure of this nasty trick is going to save cardholders a small fortune. To that end, you may have read many reports about how there will now be a fair order of repayments. If only it was that simple.
Squeezing the pounds out of customers
Ever-suspicious (that's my job) I have considered what is coming next and I have worked out what the next credit card booby trap is going to be. Indeed, I have established that from 1 September 2010 this trap will already be costing some of you money in a very underhand way.
MBNA has its own credit cards and also issues cards for dozens of other companies, such as Virgin Money. From September, MBNA will switch to paying off the most expensive debts first, four months before agreed with the government. However, I asked it how it will allocate repayments when two 0% deals are running simultaneously and its answer was not good.
Imagine you have taken out an MBNA credit card that is 0% on balance transfers (plus a small fee) for 12 months and 0% on purchases for three months. Let's say that you immediately transfer a balance of £1,000 and make a purchase for £1,000 too. During the first three months you have two deals of 0%.
MBNA tells me that, from 1 September, any repayments you make during the time both 0% deals are live will not be allocated to the shortest deal.
Instead they will go towards the transaction that will revert to a higher interest rate. This means that it can charge a nominally higher interest rate on balance transfers than on purchases in order to direct your repayments to the longer 0% deal.
Hence, if you were to pay three equal instalments of £333.33, you'd find that it was the balance transfer that you cleared when your 0% purchase deal ends. You will then have a £1,000 debt that is costing you a very high interest rate.
I don't know how many times the word 'sneaky' has been used in connection with credit card small print, but it's a good word for it. That is why the problem of the order of repayments will live on at MBNA despite government intervention, albeit with a reduced impact. Perhaps other card providers will take the same line.
It is not all bad news
No card provider uses every possible booby trap, which is handy as I've counted more than two dozen different tricks. It's widely known that Nationwide's credit card already pays off the highest interest rate first, but it has happily confirmed today that it will also continue to pay off the shortest 0% deal first, in contrast to MBNA.
Saga and some other companies offer deals of equal length that revert to the same APR afterwards, which makes this card trick impossible to pull off. If you have a nine-month balance transfer deal and a nine-month purchase deal running simultaneously that both revert to 16% afterwards, it makes no difference which type of transaction the card provider pays off first: it will cost you the same.
Barclaycard has told me today that it will not be following MBNA's footsteps. From January 2011 it is going to allocate payments to the shortest 0% deal first, when a customer has used two different 0% deals.
To be safe, try clear your entire card debt before either 0% deal ends or - better yet - use a credit card for one type of transaction only.
Unfortunately, I don't have time to chase every card provider and press them for a direct answer. What's more, taking Barclaycard as an example, this information isn't displayed in the neat little Summary Box of key terms that all card providers are obliged to show us.
What I can do is list all the cards I have found that are issued by MBNA (correct as of December 2009), which will be using this trick:
* AA
* BikeCard
* BMF
* BMI
* breakthough breast cancer
* british heart foundation
* Cheshire Building Society
* Childline
* Football clubs
* homebase
* ICICI
* MBNA
* Melton Mobray Building Society
* Norwich & Peterborough
* PADI
* Play.com
* Rugby League clubs
* Ryanair
* Ski Club GB
* Star trek
* Sonycard
* Toys R US
* Unicef
* Virgin Money
* Virgin Atlantic
* World superbikes
* WWF
When MBNA announced its first set of changes will occur next month, it said: "This [change] is in the interest of our customers and they should be benefiting now." I hope in the same spirit it reconsiders how it will allocate payments when there are two 0% deals running at once.
Reference:
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Nate
