We are moving relentlessly towards a paperless and cashless society. This is both convenient and environmentally sound; but such frictionless spending also brings dangers. We must all become much more careful in monitoring where our money goes.
Using credit cards to make contactless payments for Tube or bus fares, Uber journeys, coffee, sandwiches and other small purchases can soon build to a big spend over the course of a month. Barclaycard estimates that more than half of eligible transactions are made using contactless cards. Nine in 10 transactions under £30 in fast food outlets, pubs and bars are made via contactless.
If you have also opted for paperless billing (as about half of credit card customers have), overspending can slip under the radar until a payment is missed. Even your credit rating, the measure of your financial status, could be affected.
Those who have retained their ability to receive paper bills may be more aware of the dangers. A printed record of card payments is a stark list of outgoings, especially as we analyse the biggest bills of the year in the weeks after Christmas.
But interpretation is often needed; many retailers use different trading names when processing your purchases. It is also often difficult to assess whether all the amounts charged are correct. That Transport for London charge of £5.80 on December 7 was higher than usual. But what journey was it for?
Keeping track is difficult if you do not keep a record of abnormal spending. If the bills are higher than you expected, it is time to check that you are getting what you paid for. What about the Christmas tree lights that my husband ordered? They did not arrive but he was charged for the additional three-year insurance on his credit card.
For most of us, small amounts may seem too petty to fuss about. They are definitely lower than the £30 threshold limit for disputed credit card payments under the Consumer Credit Act. However, like the surcharges for using a credit card that were banned earlier this month under EU legislation, these small payments can quickly add up. I recently checked my credit card bills during the past few months and identified several unknown payments.
Zero interest options
When I took out my first credit card more than 30 years ago, the bank base rate was 11.5 per cent and the card charged 26.8 per cent interest to all its customers. Now, millions of customers have zero interest credit cards. These tend to be issued to people who could afford to pay for their shopping without credit, but like the convenience and extra protection of cards. Research by the Institute for Fiscal Studies published last week said that 60 per cent of unsecured debt is held by households with above-average incomes and that more than half have “more than enough financial assets to pay them off”.
Lots of these customers use their creditworthiness to transfer a balance from one credit card to another every couple of years. My latest interest-free offer — which I seem to get every month by email or direct mail — would allow me to move debts of up to £12,000 for the payment of a 0.9 per cent fee. This would be 90 per cent of my credit limit and I would pay no interest until February 2019.
My son, by contrast, has been offered a transfer of £1,100 of debt for a year. On checking the deal he was told that the effective balance transfer fee would be 1.4 per cent, but an initial balance transfer fee of 3.5 per cent would be levied, and the credit card company would then apply a credit within 28 working days to reduce it to 1.4 per cent. Nowadays, because of credit profiling and the vast amount of data held by credit card companies, virtually every applicant can be offered a different deal.
For people who want to spend without paying interest, there is greater scope. There are currently 15 cards with 29-31 months zero interest purchase periods. Not everyone who applies will get the card; some will be offered a smaller credit limit or balance transfer or an offer for a shorter period. Once the application is made, it is on an applicant’s credit profile and they are likely to get a worse offer if they apply elsewhere. It is possible to check your likelihood of getting a deal on a price comparison site without the information being logged by credit reference agencies.
But beware — those who take out free cards are likely to pay higher-than-average rates when the zero-interest period is over or if they spend on a balance transfer card. If they miss a payment or exceed their credit limit they can be charged a punitive interest rate plus penalty fees. As soon as a zero-interest balance transfer card is taken out, a monthly direct debit should be set up to pay off the debt in full within the free period.
Despite the billions of pounds borrowed in the UK using zero interest deals, the average credit card interest rate was 23 per cent in November, according to finance website Moneyfacts. This is after a decade of historically low bank base rates. The base rate increased to 0.5 per cent in November but some credit cards charge rates of 35 per cent and higher to people trying to build a better credit profile. These customers should pay off any borrowings in full each month so that they do not incur these massive costs. In doing so they are showing the market that they are trustworthy.
The Bank of England delivered a sobering finding last summer, when a survey it commissioned found millions of default notices were issued for credit card debt in the three months to June 2017.
Not only are the penalties expensive — interest rates are increased and a fixed fee of around £12 is added for each missed or late payment — but it is also possible that the credit card company will act to stop further spending.
Some defaulters will have been careless with either printed or paperless bills or in tallying their contactless purchases. But those regretting going paperless can change back. Once spending mistakes have been made, it takes years for them to be wiped from your credit records.
Lindsay Cook is co-founder of consumer website MoneyFightClub.com and co-author of “Money Fight Club: Saving Money One Punch at a Time”, published by Harriman House. If you have a problem for the Money Mentor to look into, email firstname.lastname@example.org.
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