Seven ways credit cards rip you off – and what to do about it

Used wisely, credit cards can help you borrow at little-to-no cost, while offering legal section 75 protection covering up to £30,000 should something go wrong with your purchase. 

Some also come with rewards, like points, cashback and discounts, where you can earn money back on your spending.

But they also come with pitfalls, like extra fees and charges, which can make them extremely costly if you spend or borrow in the wrong way.

Telegraph Money finds out how credit cards rip you off – and how you can avoid getting caught out.  

Charging you higher interest rates than advertised

Banks commonly advertise credit cards with annual percentage rates (APR) of 20pc to 30pc, but this rate is the “representative APR”. This rate only has to be offered to 51pc of successful applicants, according to Fairer Finance, a consumer group.

The other 49pc of applicants may get offered a much higher rate, which can be up to 60pc.

This is because the advertised representative APR is “subject to status”; some applicants may be deemed eligible for the credit card, but may be charged a higher rate of interest due to having a lower credit score.

James Dayley of Fairer Finance said it is worth bearing this in mind before you apply: “The rate you get is often not disclosed to you until you’ve made a full application, which leaves a hard footprint on your credit file.

“This means that if you don’t like the look of what you’ve been offered, your credit score will already be dented if you decide to reject the offer and apply for another card elsewhere.”

Also bear in mind that APR only includes compulsory charges – things like exceeding your credit limit or late repayments will come with additional fines.

Costs for failing to pay off your full balance

You can usually borrow money interest-free with a credit card if you pay off your balance in full by the payment date on your statement.

Any balance that’s left, however, will start to accrue interest, which can add up very quickly.

If you’re not planning on paying off your full balance, you’ll still be required to make a minimum repayment each month.

Make sure you know when this is due, as late payments can be noted on your credit record, and could have a negative impact on future credit applications.

If you’re worried about forgetting to make payments on time, consider setting up a direct debit.

Missed payment costs on 0pc deals

If you have a 0pc interest credit card, you won’t accrue interest on your balance, but you’ll still need to make minimum repayments each month. Missing a payment can have pretty dire consequences, as some lenders will withdraw the 0pc offer altogether.

If this happens, the whole balance will immediately revert to the regular interest rate, usually between 20pc to 60pc. 

“New spending will start being charged interest at the standard rate – and most card providers won’t stop charging interest on those new purchases until you’ve cleared your entire balance in full – including the 0pc part,” said Mr Dayley.

If you’d been planning to use the credit card for a big ticket purchase and gradually pay it off, for example, losing a 0pc deal could mean you’ll either need to pay off the balance faster than you’d planned, or face a huge hike in interest.

Missed payments will also be recorded on your credit file, and can not only reduce your credit score, but will remain visible to potential lenders for six years afterwards, potentially hampering your ability to borrow in future.

Extra fees for cash withdrawals

Using a credit card for withdrawing cash is something you should try to only do in emergencies, as it can be a costly way to access cash.

Some lenders will charge a fee for ATM transactions, and you can also expect to pay interest on the amount from the moment the cash leaves the ATM.

Withdrawing cash using your credit card can also have an adverse effect on your credit score; according to credit reference agency Equifax, lenders may look on cash withdrawals unfavourably, as it could indicate you’re poor at managing your money.

If you need to withdraw cash, it’s usually far cheaper to opt for a debit card instead.

Charges for using your credit card abroad

Beware of hefty fees for using some credit cards when you’re abroad. If you take cash out, there are even bigger costs.

The main charges you need to watch out for are non-sterling transaction fees, which are usually charged as a percentage of up to 2.99pc of the cost of each transaction you make; non-sterling cash fees, which are typically around 3pc charged on ATM withdrawals; interest on cash withdrawals, which you’ll accrue as soon as a cash withdrawal has been made, and tend to be much higher than other rates of interest.

Some credit cards will hit you with all three charges for spending and withdrawing cash on holiday – so opting for a card specifically designed for travellers could prove much cheaper.

However, even if you find a card that offers fee-free ATM withdrawals abroad, you may still want to avoid making cash withdrawals, as even specialist credit cards will charge interest from the time the transaction is made. 

What’s more, travel credit cards don’t tend to have the lowest APRs, so you should ideally pay off the balance in full each month.

As a final holiday spending tip, make sure you always opt to pay in the local currency, as you’ll get a more favourable exchange rate.

Perks that come with an annual fee

In addition to the APR interest and other fees, some credit cards also charge an annual fee, which just covers the cost of having the card regardless of how much you spend on it.

Usually, the fee can be justified by some kind of perk that you wouldn’t be able to get with a “free” credit card. 

For instance, the American Express Platinum Cashback Credit Card has a £25 annual fee, but you can earn up to £125 in cashback over the first three months, and then 0.75pc cashback on spending up to £10,000, and 1.25pc cashback on spending over £10,000. 

Its “free” equivalent, the American Express Platinum Cashback Everyday Credit Card, allows you to earn up to £100 in cashback during the first three months, then pays 0.5pc on spending up to £10,000, and 1pc if you spend more.

Regardless of what the perks are, you’ll need to weigh up whether you’ll use them enough to make the extra cost worth it.

Charges for transferring to another card

It can be a good move to transfer your debt to a credit card that’s specifically designed to help you pay it back, like a 0pc balance transfer credit card. 

For a limited time, your balance will accrue very little interest – or no interest at all – making it easier to pay off the balance and save money on interest. Several providers offer a 0pc period of up to 30 months, but you’ll still need to make minimum repayments during this time.

However, transferring a balance from another card can involve a fee of up to 5pc of the balance – if you’re transferring a £10,000 balance, this means you’d get a transfer fee of up to £500.

You’ll need to weigh up the fee with the length of the 0pc balance transfer; if it gives you enough time to pay off the balance, it could be worth the fee. But if you have several balances you want to transfer, you might be better off using your cash to pay off each card rather than fund multiple transfers.