Before 2009 I was in a dark place both emotionally and financially.

I held the view that credit cards were there to supplement missing income, handling day-to-day spending (and carrying the balance) and that minimum payments were my best friend.

What an idiot I was.

Today, continuing my ongoing thoughts on reducing the costs of debt I totaled up the cost of my “hell” credit card which is now paid off, and my “heaven” credit card that carries a balance, but at 0% APR. Once paid off this card will never carry a balance again. It will be set to ‘pay in full’.

The Hell Card was mismanaged from the day I got it (9 June 2001), and virtually ignored from 2006 onwards. This card has cost me thousands of pounds in interest, overlimit fees and payment protection insurance that I didn’t even know I had. While the online facility doesn’t provide full access to statements from day one, I have totaled up the last year to date and had a look at how badly managing a credit card – in personal finance terms – can cost you dearly.

The interesting point is throughout the life of this card, I have been reported every month as an ‘excellent’ customer to the Credit Reference Agencies. The company concerned has made money off me every single month for 8 years, and I have never missed a payment. I was their ideal customer: paid on time, always carried a balance, never challenged their fees and had their insurance to boot.

What an idiot I was.

As we can see, for the first 4 data-set points I was still burying my head in the sand. The minimum payment was going up, the interest was going up, the PPI costs were going up, and I was being dinged with a £16 over-limit fee every single month on top of this.

The next month I was charged interest on this over-limit fee, and interest on the interest of the over-limit fee on top of the balance. When you start compounding credit card fees, your debt quickly snowballs into hellish proportions.

On the 4th data point above (January 2009) I had my light-bulb moment. I’d had enough and wanted out. I balance transferred £900 off of the card onto a 0% deal, made a one-off payment to get back under my credit limit, and upped my regular payments. The fees stopped on the next statement.

From that point onwards, the card looks more sensible. Imagine for a moment though what the graph would look like if I had access to the previous 7 years worth of data. I will be writing to the company to try and get this information for another post – I’m genuinely interested to see what it looks like.

The cost of the Payment Protection Insurance goes down with the balance, as does the minimum payment required and the interest being charged. If I’d been sensible I should have canceled the PPI in January, but hindsight is a wonderful thing.

What an idiot I was.

The Heaven Card in contrast, has been well-managed from day one.

I obtained it as part of my journey to financial sensibility and debt freedom, so perhaps this shouldn’t be too surprising. I stupidly let myself be sold card protection when I activated the card, and the fee for this was charged to my Standard Balance behind my 0% transfer. Oops. Over the whole year though, the interest only works out at £12: less than one over-limit charge on the hell card.

If I’d noticed what was happening over card protection, I would not have paid a single penny in interest during the life of the balance transfer. No fees, no interest, no PPI, nada. Compare this to the hell card:

That looks considerably less painful to my wallet – and it was. Aside from the (currently) £8 in interest from my Card Protection error, I’ve not paid a single bit of interest, or PPI or fees. In 1.9 payments time the balance will be £0 and I would have paid just £10 interest for my card protection blunder. Not too shabby, and not a mistake I’ll be making again.

In total, in just 12 months (and I only had my head buried in the sand for 3.5 of those months) I got stung for £664.14 worth of interest, insurance and fees for borrowing £3,500 on my hell card. Multiply that over 7 years and that is potentially £4,648.98 worth! What an amazing waste of money. That is – all but pennies – exactly how much I am still in debt by as of August 2009. Ironic.

The real kicker: If I had opened a savings account in 2001 with £10, and paid myself that sum divided over the months, compounding monthly earning 5% for 8 years I’d be sitting on £6,558.41!

What an idiot I was.

I will be attempting to reclaim these charges at some point – if I win then it will go nicely towards getting my Emergency Fund going. If not, then no harm in trying.

I think it important I make the point that despite my own idiocy, I still do not view credit cards as  inherently bad. They are not your best friend by any means, but credit cards are a tool much like a chainsaw. If you are sensible with the tool, it can make life much easier. Used correctly it can even make you money.

If you are an idiot with it though, it can cost you dearly.

• The Credit Crunch Has Positives
• The Importance of Redundancy Planning
• Why Rate Chasing is Worth It
• Dig Yourself Out of Debt: Know What You Owe
• My Final Credit Card Payment Coming Due

The postman dropped the usual rainforest through the door this morning and after sorting the wheat from the chaff, I was left with my LoveFilm DVD delivery, my PC Pro subscription, a Vision Express money-off voucher and something from Barclaycard.

It’s a bit early for my credit card statement, so I ripped it open wondering what they wanted. Within was a letter and attached, 2 cheques.

The Offer

“Hello Mr Five Pence Piece,

Your Barclaycard is ideal when you need to buy something. We can also help you manage your finances with a 0% balance transfer offer (a 2.5% handling fee applies). Moving balances from your other cards to your Barclaycard could reduce the interest you pay and make managing your money easier.”

Sounds pretty good so far, doesn’t it? No hard sell, and they’re offering to save me money.

“Here’s how it works.

0% interest until March 2010 (a 2.5% handling fee applies). [...] Any outstanding balance after your March 2010 statement will go back to your standard purchase rate of 12.9% p.a.”

Where’s The Catch?

Still struggling to see the catch? Well, based on what is written in the letter and copied above, there isn’t one. Transfer a balance, pay no interest on it until March 2010 for just a 2.5% one off fee. If you manage to pay it off before or by March, then it’s 0%. Have a little bit left after that, they’ll charge you your standard purchasing rate on the remaining balance.

That really could save you money off of other cards, so what’s the problem?

Check the Small Print

Flipping over the letter to the small print on the back, my eyes fell on the ‘Allocation of Payments’ section. Here it is:

Payments you make are applied in the following order:

• Default Charges and interest on Default Charges
• Promotional Balances (if you have more than one promotional balance your transferred balances are paid before promotional purchases, then open ended offers first, then lowest rate first, then oldest offer before newer)
• Interest and other charges
• Standard balance
• Cash balance and Barclaycard cheques (unless there is a promotional rate).

Confused? Don’t worry; that’s the idea.

Picture the Scene

I’m going to use Selina again, my imaginary friend from the Dig Yourself Out of Debt series. I’m sure she won’t mind too much.  As we know, she has 2 credit cards; One has a £5,000 balance at 14.9%, and another with a £1,000 balance at 24.9%.

Her new Barclaycard for which she’s just received these cheques didn’t have a promotional rate to begin with, but she had been using it on and off to buy stuff she needs when she runs out of cash towards the end of the month before learning how to be more sensible and start digging herself out.

The purchase rate on her Barclaycard is 6.9% (non-promotional) so carrying a balance wasn’t that big of a deal to her, and her balance currently stands at a not too terrible £500. The minimum payment is just £10 and each month it costs her around £2.50 in interest.

A little knowledge is a dangerous thing. She’s just caught the money saving bug, so decides she’d be far better off by transferring her expensive £1,000 balance (at 24.9%) onto her Barclaycard, and paying it off before March 2010. She writes the cheque, and puts it in the post.

Job done. It cost her £25 to transfer her £1,000 balance (remember that 2.5% ‘handling fee’?) but she is saving £20 every month in interest fees from the old card.

So far, so good.

It’s Behind You!

Seen where this is going yet? Selina rumbles along paying off amounts she can afford each month. Sometimes more than the minimum, but never the maximum amount as she cannot afford anywhere near that. She feels good knowing that she is spending out less money than she was, even if it takes here longer than March 2010 to pay it all off.

But is she really?

The minimum payment hovers around the £70 mark. Sometimes she pays up the minimum, sometimes she stretches that to £100. Here’s the problem: From the list of the way payments are applied above, Selina is currently paying off her balance transfer. This might well be at 0%, but she is still accruing interest on her ‘old’ £500 balance from purchases, and will continue until she pays off every last penny of the balance transfer!

I’m still wondering if a balance transfer cheque (if not paid off in full by the time the promotional rate expires) reverts to the “Cash balance and Barclaycard cheques” section of payment allocation. If they do, then they’ll sting you for even more interest while you then pay off your standard balance – it’s not terribly clear (and isn’t that just the point).

Imagine how much worse this would be if she’d taken a cash advance before doing the transfer. With it’s 3% fee and 28.9% interest rate, she’d accrue interest on that as well as her old £500 balance month in, month out. The only way she could stop paying interest is to stump up £1,500 in one go and pay off the card in full.

Credit Card Companies Are Not Your Friend

Despite the friendly wording of their letters (if you’ve not been naughty at least), they are not your friends. They are businesses, and businesses are out there to do one thing: make lots and lots of profit for themselves and their shareholders.

I may appear to be picking on Barclaycard but rest assured all credit card companies are the same. It’s just they’re the first this year to have sent me any so were timely cannon-fodder.

So what did I do?

Putting Selina back in her room – after all the cheques were mine not hers in reality – what did I do with them? I already have a promotional balance transfer on my card, and no purchases. I don’t have another credit card with a balance that isn’t paid in full every month, so I put them in the shredder.

To truly and safely benefit from this 0% deal, my Barclaycard would have to have a balance of £0.00.

To stay safe and get the most out of your credit card, stick to one promotion at a time, and don’t mix when it comes to purchases and balance transfers. If you have a card you got for a balance transfer, do not spend on it. Do not draw cash out on it. Freeze it in a block of ice and keep it in the freezer if you don’t trust yourself.

One thing is for sure – mixing standard and promotional rates will quickly make you poor and that’s what they want. The more you’re a slave to credit, the more profit they make.

Don’t fall for it.

• A Guide to: Individual Savings Accounts (ISA)
• My Financial Meltdown: Part 3
• Dig Yourself Out of Debt: Cleaning Up
• The Importance of Redundancy Planning
• Dig Yourself Out of Debt: Avalanches and Snowflakes

This is part 3 of the Meltdown Monday series. You can catch up on part 2 here.

My solicitor (it still feels weird saying that) gave me a bit of a grilling about my personal finances, and how stupid I’d been to have been taken for such a ride in the first place. I think he felt sorry for me in a way, and I’m glad he said what he did. I walked out of his office very depressed, but inside me something clicked. I suddenly became very determined to beat my debt situation and turn my life around. I’ve since discovered this is commonly termed your ‘Light-Bulb Moment‘, particularly by the folks over at the money forum I frequent.

When I got home, my drive was still there to do it. I went over my bank statements again, except this time concentrating on my own spending; Every month there was hundreds of pounds of unnccessary spending of my own doing on there. Expensive organic food shopping, premium diesel, takeaways, gadgets, insurances and more. I was also paying off 2 credit cards and 3 personal loans with wildly varying interest rates, so I needed to work out what I owed and to whom. I worked up a spreadsheet (budget) of my essential spending, and vowed to cut out everything else, trying desperately to spend less than I earned. I drastically cut spending even on essentials: my food shopping allowance to myself dropped from an average of £300 a month down to just £50, my diesel average spend had to drop from £250 as that was an insane amount of money just to spend on getting to work and back.

Then, it was time to attack my debts.

One credit card I’d ignored for the best part of 3 years: it refused to work in the petrol station one morning and I buried my head in the sand from that point onwards. I assumed that as I was paying upwards of £100+ a month on it, the balance must be shrinking. Instead – after biting the bullet, phoning them and resetting my access details for online banking – it turned out I was over my credit limit and had been incurring £16 fees every month for the privilege for the last 3 years! I was also paying interest on these fees every month, so my balance was going up not down, despite my payments. £120 was taken automatically from me every month, but after £90 interest was added, £20 Payment Protection added, and then a £16 fee on top,  my monthly repayments were not touching the balance at all.

Despite this, my credit rating was still good. I arranged an appointment at my bank with a financial adviser and went down with my tail between my legs a few days later in the frigid January morning air. I’ve been with my bank since I was 12, and I honestly believe in this instance, loyalty paid off. I explained my circumstances, was brutally honest, and despite the bank earning loads off me, the lady I saw was keen to help me. She consolidated my existing loans (one at 19% APR, the other at 12% APR) into one loan at a much more preferable 8%, and said I was also showing as pre-approved for the Barclaycard Platinum card that carried a 15 month 0% balance transfer for new customers. She said it was unlikely I’d get a great initial credit limit due partly to policy and partly my existing credit commitments, but anything would be better than nothing for transfer purposes. She also made a point of saying that I shouldn’t be tempted to spend on the card, as despite it having 0% on new purchases for 3 months, the terms of the card meant my balance transfer would be paid first, meaning I’d be stung for interest on the purchases all the while any transfer remained.

Honest advice from a bank – how terribly refreshing!

I walked out instantly having saved £55 a month in loan repayments, and shaved 12 months off the term. Even better was the payment holiday the loan gave me to begin with; 2 months with nothing to pay. I needed this, as it helped me work out where I was without worrying I would end up in my overdraft again.

Shortly thereafter my new credit card arrived with a £1,000 limit. Not great, but £1,000 at 0% is better than £1,000 at 16.9%, so I transferred what I could off my old card onto the new one, and planned to pay off the remainder as quickly as I could. The other credit card I paid off and closed instantly, as it had a surprisingly low balance already. I upped my automatic payment to £400 every month, and made an immediate one-off payment to get me just under my credit limit again to stop the charges. For the first time in 3 years, my credit card balance would reduce on the next payment!

I felt terribly alone at this point. Despite having a good relationship with my family, it’s not a topic I personally feel comfortable discussing with them in great detail. I wanted to feel part of a group in my fight, and to know I wasn’t alone. I mentioned debt to a trusted friend at work and he introduced me to Money Saving Expert (or ‘MSE’ to its friends). The website is a goldmine of information, but the forums are the real feature; Thousands of helpful people from all industries, sectors and walks of life combine together to cut bills, reduce outgoings, help the environment, help each other and play big corporations at their own games. I was hooked instantly – I felt like I belonged – and with their help, I planned my way out of debt for good.

Quite arbitrarily, I set my Debt Free Day as New Years Day 2010. I knew I would struggle to meet that goal, and struggle a lot. I owed £16,000 (if I included my overdraft), or potentially £20,000 (if I include my projected divorce cost), but the difficulty of it is in part why I chose it. I work best under pressure, and it was a significant date, too. It was almost exactly a year after I moved out of my old home and back in with my parents, and it also signified a new beginning: A new year, a new decade, and a new, debt-free me.

Since that moment, I have been working every possible hour of overtime humanly possible, and saving every penny after paying off my debts according to my own plan.

Continue to Part 4…

• My Final Credit Card Payment Coming Due
• My Networth Update - Aug 2009
• Dig Yourself Out of Debt: Know What You Owe
• American Banking v. English Banking
• MBNA Launch Best Credit Card Balance Transfer Deal Ever