The perils of misusing your credit card

Credit cards can be a great financial tool. Not only do they allow you to spread the cost of purchases, they also offer rewards for spending and increased protection against fraud.

However, your 'flexible friend' can soon turn enemy if you do not take care to avoid the costly credit card pitfalls that cause so many Britons to be caught out by high interest rates, fees and charges.

In fact, research from MoneySupermarket reveals that inefficient use of your credit card can cost a massive £293 a year.

Kevin Mountford, head of banking at MoneySupermarket, said: "A worrying amount of people may be paying well over the odds simply due to poor practice."

Two of the most common pitfalls include paying interest on your existing debt despite numerous 0% balance transfer cards being available, and missing monthly payments.

Other examples of bad credit card management include paying only the minimum amount off your debts each month and using your plastic to make withdrawals from cash machines.

Here, we explain how to get the most out of your credit card by using it in the most efficient way, and look at some of the goodies you could treat yourself to with the cash you save.

Interest payments

Two-thirds of the credit cards held by UK consumers currently bear interest.

But you can avoid paying interest on your debts by switching them to a 0% balance transfer credit card.

The Barclaycard Platinum Card with Extended Balance Transfer, for example, offers 22 months at 0% (subject to a one-off balance transfer fee of 2.9%).

It is important to clear your balance within 22 months, though, as the representative APR on the card is 17.9% (variable).

Other options include the

Halifax Balance Transfer Credit Card, which also offers 22 months at 0% and charges a representative APR of 17.9% (variable), but has a slightly higher one-off fee of 3.5%.

And if you think you can clear your debts in a shorter time, there is also the Virgin Low Fee Balance Transfer Credit Card, which offers 0% for nine months. This card has a one-off charge of as little as 1.5% and a representative APR of 16.8% (variable).

Missed payments

Recent figures from MoneySupermarket revealed that more than one in six - or some 8million Britons - missed at least one credit card bill payment in the last 12 months. Of these, some 3million failed to meet their credit card repayment schedule.

But falling foul of the terms and conditions of a credit agreement can lead to mounting penalty fees and have a negative impact on your credit score.

It is therefore vital to keep up with your payments as even being a couple of days late can have serious consequences.

This is particularly true if you have a credit card offering 0% on purchases, for example, as missing just one payment date could lead to the promotional offer being withdrawn.

And for a typical borrower on a 12-month 0% deal, this could result in whopping interest charges of £206 if they defaulted to the average credit card rate of 17.31%.

Setting up a direct debit to pay off at least the minimum amount required each month could therefore prove a sensible move.

Kevin Mountford said: "Missing or making a late payment is a costly move. Setting up a direct debit is one of the best ways to prevent this."

Minimum payments

Most credit card holders pay off more than the minimum amount required each month.

However, MoneySupermarket's calculations indicate that someone with a balance of £1,500 on a card with an average APR of 17.31%, would take a staggering 19 years and three months to clear the debt if he or she made just the typical minimum repayment of 2.5% each month.

Over that time, he or she would also fork out a massive £1,590 in extra interest as a result of the paltry repayments made.

If you are struggling to make your monthly repayments, it may therefore be worth switching your debts to one of the 0% balance transfer cards described above.

Remember, though, that you will need a good credit score to qualify for any of these market-leading deals.

As rejected applications will leave a black mark on your credit file, it is therefore worth using the MoneySupermarket SmartSearch credit profiling tool to find out which cards are likely to accept you - without damaging your credit file.

What's more, you may well find that you can qualify for a great deal, even if your credit score is poor.

Kevin Mountford said: "If you have a poor credit rating, the good news is that the new Capital One Classic credit builder card offers customers the kind of interest break typically reserved for those with the best credit scores.

"It offers 0% on purchases up until August 2012. However, because it is aimed at borrowers with a low credit score, the card comes with a high representative APR of 34.9% (variable), making it vital to keep up with your repayments."

Cash withdrawals

Cash advances, which include cash withdrawals, are generally charged at a much higher rate of interest than standard purchases.

This is illustrated by the fact that, while the average credit card APR is currently 17.31%, the APR charged on a withdrawal of £500, for example, is 26.72%.

And as the interest accrues from the date of the transaction, rather than the next payment date, costs are quick to mount up even if you clear your debts in full with your next monthly payment.

It is also worth noting that any form of gambling activity on your credit card will also be treated as a cash advance, while overseas money transfers or travel money purchases attract the same high rate of interest.

What you could buy with £293

Once you have started ensuring your credit card works for you and not the other way around, you could afford any of the below with the saving:

• A Bastyan evening dress from John Lewis: £275
• Two return flights for a long weekend in Barcelona in May: £280.81.
• A Monaco four seat recliner round garden patio furniture set from Argos Online: £292.12
• A 32GB iPod Touch: £249
• Jimmy Choo sandals: £280
• A Toshiba 32in HD LCD television: £289.99

Better still, use the saving to reduce your credit card balance.