Money magic: managing credit card payments

Interest rates are lower than they have been since the Bank of England was founded in 1694. But if you have a credit card the chances are you will not have noticed.

When it comes to rates, plastic cards are your inflexible friends. The average credit card interest rate has risen in the past year from 16.4% to 17.7%. That rise has cost consumers about £500m in extra interest.

Card companies are now putting up rates for some customers by far more than the average rise. They do that if a customer’s credit record indicates that lending to them has become riskier.

They call it “risk-based re-pricing”. If your card provider does put up your rate you can choose not to pay it. But to do that you have to stop using your card and you can then stick with the old rate of interest until you have repaid the debt. Remember that the way to pay off the debt more quickly is to pay a fixed sum each month rather than the minimum the card company asks for.

Risky customers

The disadvantage is that you no longer have the credit card! And if it is your only card you may not be able to get another at a better rate – or even at all. Card providers are getting much fussier about who gets their cards. And if one company has just assessed you as a bigger risk the chances are that a rival will do the same. Capital One, Barclaycard, and MBNA all have credit cards for risky customers with interest rates of about 30%.

Even if you are not a risky customer, you will pay a similar rate to that if you take out cash on your card as well as a handling fee of at least £2.50. Interest on cash – and on the fee – is typically about 28% and it starts from the moment you take the cash out even if you pay off your bill in full.

When you pay anything less than the full amount most card companies use your payment to repay the cheapest debt first. So the £50 you took out in cash – plus the £2.50 charge – can hang around for ever at 28% if you use your card for purchases as well and never pay it off in full.

So never, ever use your credit card to take out cash. You could be paying it back for the rest of your life.

Paul Lewis is a freelance writer who presents Money Box on BBC Radio 4