Desperate to reduce the number of card holders who can’t pay off their credit card, American Express in the US recently offered a $300 incentive to certain customers to stop using their card and close their account.
If only some of the Irish card providers would be so inspired. The number of people here who can’t pay off their card balance is on the rise as thousands of young workers join the Irish dole queues.
The credit card may be one of the most convenient forms of payment, but it also provides one of the easiest ways to borrow and spend.
With an estimated 2.5 million credit cards in circulation here in 2008 and nearly 120 million annual transactions worth about €14 billion, we are keen users of the little plastic cards, though we don’t hold proportionately as many cards as Americans or the British who don’t pay a €30 stamp duty per card.
We do, however, pay some of the highest interest rates on our cards and these rates are beginning to go up, just as some people are also being told the amount of credit available to them is falling.
I don’t this is such a bad thing. The higher the interest rate, the more incentive there is to monitor your spending and clear the balance sooner, though so many people fall into the trap of using up their credit balance quickly and then find themselves struggling to pay off both the interest and some capital.
The most sure-fire way to never get yourself into credit card debt is to arrange to have your balance cleared every month by direct debit. Having that deduction in place will control how much you spend.
For the person who blithely only pays the minimum required payment every month – indicated in that little box at the bottom of your statement – the outcome is disastrous.
For example, if your balance was €5,000 and your interest rate was 16.9% – not an untypical rate for many – and you only paid the 2% of the required balance, it would take you 568 months, or 47 years, to pay off the entire loan.
You would also have paid a whopping €10,780 in interest on those €5,000 worth of purchases!
With so many people now struggling to find sufficient cash by the end of the month to pay their bills, you need to lower that credit card balance.
Here are my five best tips to remove your flexible friend’s ‘fingers’ from around your neck and to regain control of your card.
1: Find out exactly what credit rate you are paying. Ask your bank if it has a better rate and how many months free credit they will give you to switch to that card.
2: If you bank doesn’t cooperate (and you account is in good standing) take advantage of the once-a-year, free stamp duty card switch facility and move to a provider with a free or low interest rate period AND a lower interest rate for when your free period is over.
The likes of Halifax and Bank of Ireland offer 0% for six months and NIB, 0% for five months. MBNA cards offer a 1.9% six month switch period. The lowest, post-free period rate is Bank of Ireland’s card at 9.5%.
3: While you are paying off your credit cards balance, don’t use it (even if the bank tells you that there will be no interest on new purchases.) The idea is to clear the debt as much as you can, not increase it.
4: Once your six month period is up, think about switching to yet another zero or low balance card, though try time it so that you don’t get hit with the €30 stamp duty twice. This is especially good advice if you have a particularly large balance.
5: Still having trouble clearing the card? It’s time to speak to your lender to arrange a personal loan with a rate that is lower than the card rate. Then arrange a direct debit to pay it off. It’s also time to get the kitchen scissors out.
Finally, don’t take out any credit card until you check the credit card cost survey at www.itsyourmoney.ie.
Click on each card to get more details about extra charges and penalties, especially the cost of withdrawing cash with the card, which many of us resort to especially on holidays.
The purchase rate on Irish credit cards hasn’t risen noticeably since the downturn began, but the cost of money withdrawals has soared.
AIB and Bank of Ireland may have two of the lowest purchase rates at 8.5% and 9.5% but they’ll charge you 23.4% and 19.9% from the day of withdrawal.
Jill Kerby welcomes queries from readers. Write to her at Jill Kerby, Money Times, The Munster Express, 37, The Quay, Waterford or by email at firstname.lastname@example.org
For all your banking and insurance needs, check out Postbank at your local post office or LoCall 1890-30-30-40