Personal loan can help cut your balance
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THE wisest course of action if you have a big balance on your credit card that you want to reduce is to take out a personal loan.
Paying off a card with a personal loan will usually save money and may help with budgeting. This makes even more sense when you consider that some credit-card companies operate an underhand method of calculating the interest on your balance.
Worryingly, this can even affect those who have taken advantage of a 0pc balance transfer deal.
Known as the hierarchy of payments, most card operators will use payments you make to clear your cheapest or lowest interest debt first.
Suppose you transfer a balance of €1,000 to a card that offers 0pc interest for six months. You also spend a further €500, leaving a balance of €1,500 on the card.
The annual percentage rate (APR) for new purchases is 14.9pc, but there is no interest-free period on new purchases.
If the card provider operates a negative payment hierarchy, then your monthly payments of €100 will be used to pay off your cheapest debt first, namely your 0pc balance transfer debt of €1,000.
This means that the more expensive debts -- namely the new purchases being charged at 14.9pc -- are continuing to accrue interest in full and will not be attacked until the €1,000 balance transfer has been paid off in full.
So, check on the way payments will be used to reduce balances if you make new purchases on a balance transfer card deal.
According to industry sources, AIB, Bank of Ireland and Permanent TSB do not operate a negative payment hierarchy system on the cards they issue and instead use payments to pay off the most expensive debt first.
