It wasn’t just the bad weather that has curtailed our spending this summer. For anyone with a mortgage, the higher interest rates we are now paying (between 5.25 to 5.75 per cent) means that we have to be circumspect about our discretionary spending.
You still need to eat – but perhaps less outside the home. Groceries have been partly sourced at the discount grocery stores and not just big Irish multiples. Higher petrol prices mean we are starting to use more public transport and are rethinking unnecessary short and long-haul driving drips.
Even credit card usage has fallen in the last couple of months, though the number of cards we have in our pockets has increased.
During June there were 2,204,000 private (as opposed to company) credit cards in circulation. In July there were 2,222,000 – an even bigger jump than the 2,101,000 we held in June 2007.
And while the amount we spent on our cards in July of this year – €1,089.2 billion, is slightly down on June’s spending of €1,013.6 billion, we have been steadily increasing the amount we’ve left unpaid on our accounts: from €2,864.4 billion in June to €2,867.4 in July ’07. A year ago, in July ’07 we had ‘just’ €2,595.6 billion outstanding.
These billions, if you prefer carry typical interest rates that are as low as 8.5 per cent (AIB’s ‘Click’ card for on-line customers) to a high as 17.9 per cent for a standard card from Ulster Bank, GE Money and even 19.1 per cent for an American Express ‘Blue’ card.
Bank of Ireland (9.5), National Irish Bank (9.7 and 10.5), Permanent TSB (9.9), the Halifax (10.9), and the EBS (10.9) all have card rates under 11 per cent, though the lowest tend to apply to gold-type card holders with higher incomes.
If you are not paying a rate like this, you should consider switching. But be aware that not every bank offers a zero per cent switching period.
Those that do – like First Active and Ulster Bank (0 per cent for nine months) both put you onto their standard rates thereafter of 14.9 per cent and either 15.9 or 17.9 per cent respectively.
Meanwhile Halifax, which only offers a six-month free switch period, has a flat rate thereafter of 10.9 per cent and is the one you should go for. See www.itsyourmoney.ie for credit card survey.
The cost difference between holding a card with a 16 per cent interest rate and one with 10 per cent is a payment of 40 per cent less interest overall every year and even more if you pay off capital as well as just the minimum required payment.
The differential is even greater if you regularly withdraw cash using a credit card. Instead of just 8.5 per cent interest, AIB’s cheap ‘Click’ card, for example, charges a whopping 22.9 per cent interest on the cash withdrawal, plus a 1.5 per cent commission fee. These charges are made from the date of purchase so no interest free period applies.
Higher interest payments also add up if you only pay off the minimum payment required which can be as little as 2.5 or three per cent of the balance you owe.
In fact, you will probably never pay off your credit card balance if you only pay the minimum because it is only interest on interest and never any capital that is being paid.
For example, someone with a €3,000 debt, with an interest rate of say, 15.9 per cent who only pays three per cent or €25 whichever is the lower of the outstanding balance every month, will still have a bill of €4,365 after five years, and this assumes the interest rate hasn’t changed.
If, somehow, your credit card company allowed you to just keep paying the lesser minimum amount off the original €3,000 indefinitely, after 25 years your total debt would have grown to an unbelievable €84,081 despite having made €7,500 worth of payments!
Ideally, you could avoid paying any interest at all by setting up a bank mandate to clear your account every month from the moment you get your first credit card.
This is the best way to never end up with a huge credit card debt because knowing you have to have the money in your account every month will prevent you from making those discretionary purchases which are so easy to do when you have a plastic card in your wallet or purse.
The road from discretionary purchases to essential ones with a credit card is shorter than you think.
If your credit card debt is still out of control (even after switching to a lower rate, or even a zero per cent card) it’s probably time to take drastic measures and cut it up.
You might want to do this after you arrange a personal loan to clear the balance – join the credit union if you think your own bank won’t lend you the money. Credit unions are there to help people who genuinely want to get out of debt.
Write to your creditors and go see your bank manager to see if some bills or debts can be rescheduled until you can get back in control. If you don’t think you can manage to do this by yourself go see your local Money and Budgeting Service (www.mabs.ie, 1890 283483) official to see if they can help.
Credit cards are hugely useful, but in straightened times, they can be dangerous too. Get control of your credit card debt now, before it controls you.