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.

A little over nine months ago (January 2009) when I was at the very bottom of my financial meltdown, I made a couple of resolves.

Firstly, I vowed I’d pay off all my debts within a year, and at the time this was a massive undertaking as I owed somewhere between £15,000 and £20,000 in unsecured loans and credit cards. I had been in debt to some degree or another for my entire adult life and I was tired of it. The thought of being able to break myself free of this was truly empowering.

Secondly, I vowed I’d save for a deposit to buy a house. Right now I am back living with my mum and step-dad. While it is comfortable and super-cheap, it is just not sustainable in the long term. I am after all, 26 years old and in need of my own space to continue to enjoy the rebirth of my financially-sensible self. On the flip side of that while my mum enjoys having me back home, I am a bit of a thorn in the side of my step-father which I totally understand: It has been quite a few decades since he’s had “children” in the house.

Do I Save to Buy?

Nine months ago the decision to buy my own house made sense on an abstract level. I’d rented for 3 years, thrown a considerable amount of money at someone else in doing so, and had nothing at the end to show for it. I lived paycheck to paycheck and got deeper and deeper into debt. Right there and then, the prospect of renting again did not seem exactly enticing.

The reason I was piling on the debt as some of you will have read wasn’t entirely my fault, but that didn’t change the perceived economics of it for me. I may as well have been spending the rent money on a mortgage payment instead and have something to show for my efforts.

I’ve thought long and hard about my decision to buy since, and come up with the following issues.

I need at least a 20% deposit to get a good rate.

A few years ago 100% mortgages (even 125% mortgages) were not uncommon. For those unfamiliar with the term, this means the bank would loan you the entire purchase price of the house outright with nothing down (in the case of 100%), or would give you the entire purchase price and then another 25% as cash on top in the latter case! Needless to say this turned into the banking credit crisis/global recession we are now all suffering, courtesy of valuation fraud, irresponsible lending, artificially high prices and lots of other reasons.

My Mortgage Advisor has pre-approved me for £154,000 (c. $255,000 USD) on my own salary.  20% of this is £30,800, or a years gross salary before overtime bonuses. That’s an awful lot of money.

House prices remain very high where I live.

Most areas in England have seen property prices fall considerably. Where I live in the cosy, relatively wealthy South East, things have not been so bad. Prices have dropped, but not to the same degree. The result therefore is, compared to the rest of the country, prices remain very high and (I posit) artificially inflated.

A 30%+ deposit would secure the very best rate.

A 20% down payment secures a good rate, but 30% or more secures the very very best. This difference could end up costing (or saving) me tens of thousands of pounds over the life of the mortgage. Except, assuming I manage to find something nice in this area for ‘only’ £154,000, that would take the required deposit up to at least £46,200.

Saving this will take 3-5 years

If I stay with my parents for between 3 and 5 years, I will have somewhere between the 20% and 40% deposit required. The problem therein, is staying with my parents for between 3 and 5 years. I know it makes sense to do it but I’m not sure I’d be welcome for that length of time. Realistically then we are talking significantly longer saving to reach the required level of funding with a ‘life on hold’ attitude to get there.

I would be spending outside my comfort zone

Interest rates are historically low right now, but they won’t stay there forever. Will I be able to afford my monthly mortgage payment when the interest rate goes up to 5%? 8%? 10%? How about 15% like it did in the 1980′s? When you load yourself up high at the beginning, a small change can tip you over. A 15% hike on a £1,200 a month repayment will be significantly more painful than one on say £500-600. Trent over at The Simple Dollar has written a couple of times about the same feeling.

I need to buy for much less than my approved maximum mortgage

What this means ultimately, is that to continue my sensible debt-free, financially secure future life, my mortgage needs to be considerably less than the maximum I know I can get. If I go all out, then for the entire term of the loan, I am going to be counting my pennies wondering when they might run out. I want to count pennies in a positive way, not in a paycheck to paycheck way.

That is a lot of issues and many of them reflect my new-found sense of requiring security in my finances. This list doesn’t even touch on the usual home-owner worries such as maintenance costs, breakdowns, insurances and many more. Get Rich Slowly (another financial blog) had a similar discussion.

Or Do I Save to Rent?

When you consider all those points, renting is incredibly simple in comparison. For a deposit (that usually equates to just one months rental payment) and one month in advance, I’d get a bigger property than I could likely afford if I tried to buy, and none of the hassle. I’d also keep my liquidity without tying it up in bricks and mortar.

Fixed Outgoings

I’d know well in advance what my monthly outgoings would be in terms of the actual physical property. Rental agreements are negotiated annually and are unlikely to vary by more than 2% in either direction in any given year and if my previous experience is anything to go by, don’t vary at all. This is very comforting to my newfound financial security complex.

Keep My Cash

If I remain with my parents for another 2 years, I can leave with £30-40,000 in the bank, with some effort. That is some serious operating capital in terms of my desire to look towards longer-term investments, bonds, the stock-market and a general healthy emergency and opportunity fund. Stick it for 3 years, and that could rise to £60,000.

No Maintenance Costs

If the boiler breaks in my rented apartment, it’ll cost me a phone-call to get the matter resolved. If I own my apartment, then the whole thing becomes my responsibility to fix. Storm damaged? Flooded? Broken into? All these are covered by a landlord. I realise Buildings and Contents Insurance will cover these but they themselves are an additional expenditure for homeownership that are not necessarily required under a rental.

Bad Area /  Street Decision?

If you’ve misjudged an area and find the crime rate high, or your neighbours a nightmare, then a letter and a few weeks can see you moving out and going somewhere better. You just do not have this kind of flexibility when you buy your own house.

But: No Security of Tenancy

There is always a downside to renting. The landlord with 2 or 6 months notice can decide he (or she) doesn’t want you as a tenant any longer and you have to move. Is this an acceptable risk, given the benefits?

And Nothing to Show For It

Finally we come back to my initial issue with renting – the fact that after possibly decades of giving someone else hundreds upon hundreds of pounds month in, month out, you still don’t own a single brick of the place. Is that a problem, long-term?

Have I Decided?

In short, no. I have no idea what to do.

I think that is part of the reason why I find myself angering quickly at the slightest thing of late. I’m grumpy, seem to have lost my sparkle for life and generally feel like I may be dipping into something I’ve rarely experienced before: depression.

I need to choose a path and then drive myself towards it. All the time I remain exactly where I am now, I will continue to feel like my life is without direction or purpose. My debt freedom goal continues to approach, and I really need to have made a decision as to what to do by then, as it will drive my saving and investment decisions. I don’t want to just feel like I’m rolling the dice to make a choice. I want it to be informed and well reasoned, and above all, right.

What would you do?

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.