Credit cards are great if they are used sensibly and provide a flexible way to borrow money in the short term. However if you're not careful, borrowing on your card could be very expensive. Follow the tips below to avoid excessive costs.


1. Don't Withdraw cash with you card

Withdrawing cash from a cash machine using a credit card is expensive. Most card issuers now charge a fee of between 2 and 3% for cash advances and interest is charged on the withdrawal straight away, rather than giving the customer the standard 50 days-plus interest free period. Furthermore cash advances are often subject to higher rates of interest than normal card spending.


2. Stay away from credit card cheques

Card companies very often send out unsolicited credit card cheques to customers urging you to 'treat' yourself to a dream holiday or home improvements or 'give yourself some extra cash'.

Most people don't realise how these cheques work. For a start you will be charged interest straight away with goods purchased using a credit card cheque, so you won't benefit from the usual interest-free period of 45 to 59 days which you normally receive for purchases. Interest is frequently charged at a fairly high rate - 20% or more is not uncommon. Then there are the handling fees of around 2% and with the average value of a credit card cheque being £850, the typical fee is £17 per transaction. All in all cheques should be avoided like the plague as they are a very expensive way to borrow money.

A recent survey from uSwitch revealed that just over half of all UK credit-card users have been sent credit card cheques with card firms making an estimated £443 million a year due to handling fees of £67 million and interest charges of £376 million.


3. Be careful when using your card abroad

Taking the wrong plastic abroad could spoil your holiday! It is estimated that banks make around £500m in extra charges from customers who spend using cards overseas.

Most card companies charge hidden "currency conversion charges" when you pay in a currency other than sterling. Quite often, card firms give you unattractive exchange rates and then add on an extra fee of 2.75%, known as a "foreign currency loading" fee. The charges can add £7 to every £100 which you spend abroad.


4. Avoid using a credit card for long term borrowing

If you're thinking of using a credit card to fund a large expense such as a car or home improvements and want to spread the repayments over a few years, you may want to think again as selecting the wrong credit card for long term borrowing can also be very expensive. With rates for personal loans around 6%, it might be better to take out a loan. Spending on plastic is great for short term borrowing, particularly with so many 0% deals for purchases for 6 months or more.


5. Avoid just making minimum repayments

Most people pay off their credit cards fairly quickly but one in ten get caught in a cycle of only making minimum repayments. If you don't pay your credit card bills in full each month, you are incurring interest that will continually mount up until the debt is cleared. If you only make the minimum repayment each month, it will inevitably take you years to repay your debt and in the process you'll pay a large interest charge.

For instance if you had a card debt of £1,600 and you make minimum monthly repayments of 2%, minimum £5. If Interest was charged interest at 1.5% a month and you kept paying until your card debt is repaid in full it would take you nearly 39 years and and you would have paid £4,000 in interest.

You should always pay more than the minimum whenever you can.