Costly credit and debit cards are not your friends
With more and more people accumulating huge credit card debts, Charlie Weston looks at top tips on how to get out of the red and dump your card forever
USING a credit card as an ongoing form of credit can ensure that your purchases cost up to an extra 20pc. So that nice jacket that's priced at €49.95 seems like a good deal, but if you knew the real cost was €60, would you still want to buy it?
That is according to calculations by Kevin Johnson, Chief Executive of the Credit Union Development Association, the representative body for some of the largest credit unions in the State.
While mortgage debt and home repossessions have dominated the media of late, lesser attention has been given to the dangers of expensive revolving debt such as credit cards, he says.
"Credit cards are an extremely expensive form of credit, the use of which has been to the financial detriment of many people."
We have seen some breath-taking credit card balances. In some cases, the balance would have taken up to 25 years to clear at the current "minimum payment", Mr Johnson says.
Late payment fees coupled with interest surcharges and normal interest charged gives some pretty staggering APR's (annual percentage rates), all of which are subject to compound interest.
In the last decade, acquisition of a credit or store card has simply followed the click of a button to submit an application form, the CUDA boss says.
Unfortunately, very little attention was paid to the applicant's ability to diligently manage their finances, or the affordability of the applicant to repay his/her debts.
Mr Johnson said this has resulted in not only thousands of people running up huge credit card bills which they are unable to repay, but it has also culminated in a culture where people purchase items and services they cannot afford simply because they can "stick it on their credit card" and worry about payment at a later date.
Providers of all forms of credit have a responsible role to play in helping people to avoid falling into dire financial straits that some have found themselves in due to expensive short-term credit, the credit union man said.
Credit cards are useful for those who have the financial discipline to operate them correctly, however, unfortunately a huge number of people do not.
Loans to get rid of card debt
Consumers, particularly those on the younger end of the spectrum, don't always think of their credit union when it comes to borrowing, Mr Johnson said. "But credit unions want to, and do, lend at lower interest rates, and have the cash to do so."
Most credit unions are experienced and understanding when it comes to assisting members to wean themselves off expensive forms of credit, particularly credit cards where interest rates can exceed 20pc, he said.
Some credit unions offer low-cost loans to those with high balances on their credit cards, though this is usually conditional on the members not subsequently rebuilding an outstanding debt on their credit card.
In most cases, the credit card is cut up (ceremoniously) with the funds being drawn down on a phased basis from the credit union, when proof is provided that the member is now sticking to the agreement, Mr Johnson explained.
"The primary goal is to reduce an individual's credit card debt through a series of payments made possible by the provision of a personal loan from the credit union," he said.
However, a secondary, but equally beneficial, objective is to reduce an individual's reliance on their credit card, and don't use your card to make cash withdrawals.
This works out very expensive, as you will be charged interest from the date you get the money.
Unconventional ways to clear your credit card
If you only have a small outstanding balance on your credit card - just that few hundred that you can never seem to shift - then you may find the following methods useful to get that cash together to clear your balance.
Mr Johnson suggests you should then get rid of your credit card once and for all.
The pennies make the pounds
Although we see them as a nuisance and not of much value, copper coins have value. The Central Bank has recently called on people to put their copper coins back into circulation.
Many people have jars and jars of these small coins at home and while they may seem worthless in small amounts, you might be surprised to learn that all those jars at home could add up to €20, €50 or even €100.
Recent reports suggest Irish people who have travelled outside of the eurozone over the last 12 months returned home with almost €100 each in foreign currency just lying around their homes.
It's unsurprising really that as a nation that loves to travel, many of us have sterling, dollars and other denominations in purses, wallets and drawers in our homes.
We would advise people that rather than leave it lying there and run the risk that it may never be used, cash it in and use it to clear some debt.
We all pay for financial products and services of some sort, be it car/home insurance, health insurance etc.
Because of market competition there are huge price variations for these products across the board.
This year, rather than accepting the renewal offer given to you by your current provider, we would advise you to shop around.
Invariably, when people do this they find they can save hundreds, if not thousands, on their premiums.
Too many of us are prone to 'flexible friend addiction' and need help to change and reduce our overall spend.
Credit unions generally encourage members to stick to debit cards to ensure they're only spending the money they have, Mr Johnson said.
Once people have cleared their short-term debts, they should then look to begin putting aside some savings - no matter how small.
If people begin planning now, they will be able to set a time-line of how and when they can keep up repayments, clear short-term debts, and begin saving.
Having a plan and a structure in place will make it easier for you to manage your finances, will save you a ton of money and will also give you piece of mind, Mr Johnson said.
Credit cards are a wonderful invention
...But only if consumers know how to use them properly, according to Frank Conway
They allow people to use someone else's money at no cost for up to four weeks before having to make any repayments.
If you pay off the full amount owed on the credit card, there are no interest charges.
"That works out to be one of the best financial deals on the market today," Mr Conway said.
However, credit cards charge interest on a compound basis, which means that if you do not pay off the full balance on the card from month to month, interest charges get added to the card balance each and every month.
This is why it can be so difficult to pay off the amount owed once users get trapped in a cycle of debt.
Borrowing to pay off the amount owed on a card should only be considered as a last resort and only if the user surrenders the credit card.
Research has shown that credit card users often fall back on old habits of racking up bills within a few months of clearing a balance.
"It is called being a 'credit junkie' - a dependency that the well organised can break free from with a robust personal finance plan to help them," Mr Conway said.