Smart Consumer: Cut your losses and take a scissors to your credit card
Published 31/03/2011 | 05:00
Cash-strapped consumers are cutting up their credit cards in record numbers. But could you survive without your little plastic friend and what would you save by deciding enough is enough?
A lot of people have considered that very question and decided that you can indeed survive without a credit card, with large savings the result.
The deepening recession has prompted a wave of 'card closures'. Around 100,000 credit card accounts have ceased in the past year, figures calculated by this newspaper reveal.
Some of these accounts may be a second or third account held by the same cardholder, but others have clearly decided credit cards are a dangerous financial product and we would be better off without them.
Consumers are also paying off card debt at record levels, with €191m paid off in the past year alone.
An examination of Central Bank figures shows cardholders have made massive efforts to get to grips with their debts, with the amount owed down from a total of €2.9bn at the start of 2010 to €2.7bn now.
The figures, from January of this year, also show that there are now two million personal credit cards in circulation, down 102,000 in a year.
Getting rid of a credit card could save a persistent user (or should that be an abuser of a credit card?) €1,200 a year, according to Frank Conway of personal finance website www.moneycoach.ie. Very heavy users could save €3,000 a year by ditching their credit card.
Card debt a major issue
Many households have found to their cost that credit-card debts are the most persistent and difficult to shift.
Some eight-out-of-10 people owe money on their plastic fiends.
Almost 100,000 people are three months or more in arrears on their payments on unsecured debts such as credit cards.
Rates are sky high
The market here is dominated by AIB, Bank of Ireland, MBNA and Ulster Bank.
But these providers charge some of the highest interest rates in the market.
MBNA charges the highest rate for purchases, with a rate of 21%.
High rates are also charged on cards offered by EBS, One Direct and Tesco Personal Finance.
The AIB Click card and the Bank of Ireland Clear Card have rates of around 13%, the lowest in the market for purchases.
Default levels rising
The numbers unable to repay their credit cards is soaring.
Consumers are so cash-strapped that €1 in every €10 owned on credit cards is not being paid back, according to banking research firm Lafferty Group.
MBNA offers 0% for 10 months if you transfer your balance to its platinum card.
Tesco offers 0% for six months, as does Permanent TSB's Ice card.
Prepaid cards an alternative
Difficulties with card debt and the refusal of card companies to accept applications for new cards, or transfers from one card account to another, have led to a surge in the use of prepaid cards.
Six-out-of-10 credit-card applications are now being refused and some existing cardholders are having spending limits reduced.
If you want to ditch your card a prepaid cards could be a good option. They are similar to pay-as-you-go phones in that you cannot spend more than the value loaded on to the card in advance.
O2 Money, 3V Visa, Payzone and Ruby Card are examples of prepaid cards.
They work like a normal Visa card or MasterCard, as they are accepted by the vast majority of retailers worldwide and by most ATMs (automated teller machines).
However, they are not subjected to the usual credit or background checks. This means it is unlikely that you will be rejected when you apply for one.
The advantage of a prepaid card are that you cannot spend more than the value loaded on to the card in advance.
There is no contract and no need for a bank account.
Cards can be topped up at the same outlets as mobile phones, or by bank transfer. You keep track of your balances online, by phone or by text.
These cards are useful for online purchases, with some people finding that they cannot use their Laser debit card because it is sometimes not recognised by online retailers based outside of Ireland.
The catch with prepaid cards is that charges can be sky-high.
Prepaid cards typically have initial set-up fees.
The Payzone Worldwide Money card costs €6 to buy, but the Ruby Card is €12.95.
There is no set-up fee for the O2 Money card.
Top-up, or load fees, can also be hefty. And the cost can often depend if you top up online, through a bank account, or in a retail outlet.
To top up the O2 Money card with €100 costs €1.70 online, and €1.99 at a retail outlet.
Topping up the Ruby Card costs €3.50 for up to €500 put on the card.
There are no transaction fees on the O2 Money card, but charges of 2.95pc of the value of each purchase are not unusual for other cards.
Credit is becoming scarcer but it seems there is a bit more competition for our business.