Saturday 23 September 2017

Time to purge after the Christmas splurge

If you've paid for the festive season with plastic, it's advisable to tackle the bill immediately and avoid massive interest

Minister for Finance Brian Lenihan surrounded by
credit cards. Mr Lenihan's Budget will make it more
expensive for families. Picture Jason Clarke
Minister for Finance Brian Lenihan surrounded by credit cards. Mr Lenihan's Budget will make it more expensive for families. Picture Jason Clarke
Charlie Weston

Charlie Weston

HAVE you paid for Christmas with a plastic card and now find you have a bulging bill to pay?

Well, you are not alone.

More than half the population will have borrowed to fund the festive season, a recent survey found.

And it will take most until the summer to pay off the loans taken out to finance the Christmas splurge, with some people expecting to take up to nine months to settle their debts.

Almost one-third of adults used their credit cards to pay for presents, food and drink, with others resorting to money lenders, despite interest rates as high as 180pc.

The debts are expected even though households across the country have pared back spending as the economic downturn continues to bite. But it is not just at Christmas.

Over the past few years, most of us have been on a debt binge with our credit cards, to such an extent that we owe a staggering €2.9bn.

The amount owed has changed very little in the past year, even though people have been attempting to pay off their credit card bills.

High interest rates and penalty charges are making it difficult for card holders to get the overall amount owed down, although there are signs lately that consumers are beginning to get to grips with their mountain of credit card debt.

If you have racked up enormous debt on your credit card, now might be the time to tackle it. The best advice is to always pay off as much as you can afford.

You would be wise not to miss any repayments and stop using your card again until the balance is paid.

It is worth remembering that just by making minimum payments it would take an incredible 20 years to clear your credit-card bill.

Here are six ways, some of them unconventional, to clear credit card debt:

GET A LOAN FROM FAMILY OR FRIENDS

This option is fraught with danger, the obvious pitfall being that any dispute about repayments could lead to a severing of relations. Also, the person being asked to help out may feel awkward about the situation.

However, if you can get over the embarrassment of asking for help, the big advantage is that loans from a family member or a friend are often interest free.

To ensure that neither the borrower or the lender (in this case your relative or friend) is compromised in any way, it might be a good idea to first agree the loan amount, the amount of interest, if any, and the repayment schedule, making particular reference to when the debt will be paid off.

It is then important to have this in writing and signed by both sides. If you are borrowing a large amount of money, it is only fair to agree to repay the amount and some interest.

There will be less chance of any resentment if some interest is paid.

Another way of showing your good faith is to offer some collateral. For example, you could hand over a valuable watch until the loan is repaid as a way of showing that this is a fair and formal deal.

It is also important to stick to the terms of the deal. If you, the borrower, have any difficulties meeting the repayments, approach your relative or friend and be upfront with them. Otherwise, it will not just be a loan deal that goes sour.

GET A CREDIT UNION LOAN

One good way to pummel your plastic debt is to join a credit union and sign up for one of their credit card, debt-busting deals.

Some credit unions offer credit card elimination or repayment initiatives, according to Kevin Johnson, chief executive of the Credit Union Development Association (CUDA), a representative body for some of the larger credit unions in the State.

These aim to reduce and eventually clear credit card debt through a series of personal loan payments.

However, to avail of this unique facility, the consumers must agree to halt any activity on their credit card.

Mr Johnson points out that use of a credit card is habitual and the credit unions offering this service have found that if people can break the spending splurge habit, they are less likely to run up huge credit card debts again in the future.

The schemes generally work as follows: the member agrees to stop using their credit card and applies for a sufficiently large loan to clear off the credit card in full.

That loan is drawn down in three equal instalments over four months, with the first issued as a cheque paid to the credit card company.

The member then pays the interest on the credit card for the next two months, and presents the two credit card statements to the credit union showing that they haven't used it in the meantime.

A further cheque for the second payment is then made out to the credit card company.

The exercise is repeated for the next two months at the end of which the final cheque is issued to the credit card company which will clear the remaining balance.

Members are also strongly encouraged to have their names removed from the credit card providers' marketing listing, to avoid further temptation in the future, Mr Johnson said.

"While the system isn't foolproof, it does acknowledge the habitual nature of our spending and effectively treats it as an addiction that needs to be broken," the CUDA boss added.

GET A BANK LOAN

If you are heavily indebted, it is possible to have the interest and penalty charges frozen on your card.

Credit card companies don't admit this, but if you are heavily in arrears they will agree to freeze the interest and penalties.

Once you get the credit card company to stop applying the interest and penalty charges, try and get a personal loan from your bank or credit union to pay off the card debt. Rates average around 11pc from the banks, with credits unions loans anywhere from 7pc to 12pc, depending on the credit union.

You might also be wise to cut up the card.

Check out itsyourmoney.ie for a list of interest rates charged by banks for loans in the Cost Comparison section.

GET A MORTGAGE REPAYMENT HOLIDAY

Another option is to get a mortgage repayment holiday and use the cash that is freed up to clear the credit card debt.

This option is recommended by some commercial debt advisers, but it comes with a massive health warning as your accommodation should be your number one priority and you do not want to do anything to threaten the viability of your mortgage.

We mention it as we know many people are doing this.

However, it has been revealed that some cash-strapped consumers are paying off credit card and other debts but not their mortgage, in the mistaken belief that they will not lose their home.

These people are convinced that they are entitled to a payment holiday on their mortgage.

There was also a tendency to repay credit card debt quicker than a mortgage because card providers tend to be more aggressive at chasing payments.

Many consumers mistakenly believe that the provisions of the statutory code of conduct on mortgage arrears mean they will not lose their home.

So, if you do opt to stop paying your mortgage for a while to clear credit card, or other unsecured debt, make sure it is with the agreement of your mortgage lender.

Often banks where you have both your mortgage and credit card accounts will allow this option. But tread carefully.

SELL YOUR SECOND CAR

If you are lucky enough to have a second car or a buy-to-let property or a holiday home then it might be wise to sell these items if you are heavily in debt. We are assuming here that you do not need the second car for work.

Selling off any spare goods when you are in debt is a course of action recommended by TV money guru Eddie Hobbs.

Granted, you will be selling at distressed prices but if you are really serious about eliminating your card debt you will dispose of everything you do not need for day-to-day living.

USE YOUR SAVINGS TO CLEAR DEBTS

It is amazing the number of people who have debts and savings at the same time.

Most people are saving furiously at the moment. Around ¿12 in every ¿100 earned by consumers is being saved or used to pay down debt.

However, it makes little sense to have ¿10,000 sitting in a bank account earning at most 3.5pc if you are struggling with credit card debt where the interest rate is 21pc.

Get an immediate return of 21pc by paying off your card debt with your savings.

Irish Independent

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