Credit card pitfalls to beware

How clued up are you on the small print of your credit card agreement? You might think credit cards are easy to use and easy to understand but there are numerous ways the unwary consumers could be caught out.

Here are some of the things to watch out for:

Lower credit limits

Life is getting harder for rate tarts - if you have got into the habit of moving your credit card debt from one 0% offer to another, be warned that this is becoming more difficult.

Not only is the choice of interest-free deals shrinking, but card providers are becoming more cautious about who they'll lend to and many are offering lower credit limits in light of the fact an increasing number of people are defaulting on their card payments. As a result, if you apply for a new card, you may find that the credit limit you are offered is significantly lower than you were expecting.

It's not just new customers who are seeing credit limits fall - some providers are reducing the credit facility available to existing customers.

Changes to Ts & Cs

Credit card providers reserve the right to change the terms and conditions of your card. Card firms are facing rising levels of bad debt as an increasing number of customers default on repayments. As a result they are looking to increase revenue from other areas - hiking fees and interest rates are a common way of doing it.

You need to be particularly wary of such changes if you carry a balance on your credit card.

Eligibility restrictions

The majority of credit card deals are available to anyone (although this doesn't necessarily mean your application will be accepted - this depends on your credit score). However, some products are only available to certain people.

First Direct's Gold card, for example, which offers the longest interest-free period on purchases at 12-months, is only available to those who have a First Direct current account.

If you are looking for an 0% purchase card, the M&S and Halifax One Online Special cards are good alternatives - both offer 10-month interest-free periods on purchases.

Penalty fees

If you exceed your credit limit or are late making a payment you will be charged a penalty fee - most providers charge £12. These are easy to avoid however - you just need to keep track of your spending and arrange to make your monthly payment by direct debit to ensure it's never late.

Foreign usage

Many of us rely on using credit cards when we're abroad because it's so convenient. But it can also be costly if you're not careful. Most providers levy overseas usage fees which can significantly bump up the cost of a transaction. However, a number of providers don't: the Post Office Platinum, Nationwide Gold and Thomas Cook credit cards don't charge you for use abroad, so if you travel regularly it's well worth opting for one of these deals.

Who's the card issuer?

If you already have credit card accounts but are looking for a new credit card, be aware that you may not qualify for certain offers. MBNA provides Alliance & Leicester and Virgin's credit cards, as well as being the issuer for a host of affinity and charity cards - if you already have a card that is provided by MBNA, you probably won't qualify for introductory offers on other cards within the same group. Similarly, Royal Bank of Scotland, Natwest and Mint are all part of the same group.

For example, say you had an outstanding balance on an MBNA card, and wanted to transfer it onto a 0% deal, you wouldn't qualify for Virgin's 16-month interest-free offer.

Negative payment hierarchy

Watch out for cards that offer different length interest-free periods on balance transfers and purchases. Most card providers use a repayment system whereby the cheapest debt is cleared first.

Say, you get 12-months interest-free on balance transfers and three-months on purchases, you will start accruing interest on your spending after the first three months. However, your monthly payments will go towards clearing the transferred balance, so you won't start paying for your purchases until that debt has been completely repaid. In the meantime, interest will be wracking up.

You can get round this potential trap however, by opting for a deal that has the same 0% offer for balance transfers and purchases, such as the Halifax One Online Special which has a 10-month interest-free period on both, or by taking out two cards - one for spending and one for transferring a balance on to.

The Virgin Credit Card has the longest interest free period for balance transfers at 16 months (the 0% offer on purchases lasts for just three months however, making this a great example of a card that shouldn't be used for both purposes).

Balance transfer fees

The concept of a 0% balance transfer offer is actually a bit of a misnomer as there aren't any 'free' balance transfer deals. If you want to move a debt over from another card to take advantage of an interest-free period, you will be charged a fee for doing so. Typically you'll be charged about 3% of the balance. However, fees do vary so this is something worth bearing in mind when comparing deals.

Don't withdraw cash

Credit cards can be used to withdraw money from cash machines as well as for purchases and balance transfers - but don't be tempted to use your card for this purpose. Interest rates on cash withdrawals are usually significantly higher than the standard annual percentage rate - rates in excess of 25% are not uncommon.

You will also be charged a withdrawal fee, typically between 2.5% and 3%. And, you will be charged interest from the day the withdrawal is made meaning that even if you clear your balance in full at the end of the month, you will have incurred extra costs for the 'privilege' of using your card to access cash.