I owe, I owe, so the plastic has to go...
In the third of a four-part series on shaking up your finances, Louise McBride tells how to give expensive debt the boot in 2010
NOT only can debt burn a hole of tens of thousands of euro in your pocket, it could land you in court -- or worse, take the roof from over your head.
If you make one resolution for the New Year, make it to tackle the three cardinal sins of debt: credit cards, overdrafts and expensive mortgages.
WISE UP WITH YOUR CREDIT CARD
If you're ever stuck for cash at home or abroad, don't reach for your credit card.
Yes, credit cards are a handy way to withdraw cash when you're abroad -- and they can be a last resort for those at home who are so broke they can't take out cash with their ATM cards. But you could be charged twice as much interest for using your credit card to withdraw cash as you would if you used your card to buy something. And if you're not in a position to clear that credit card bill quickly, you could have to cough up thousands of euro in interest.
For example, AIB's Platinum card -- one of the most expensive for cash withdrawals -- charges 11.5 per cent interest on credit card purchases, but 23.4 per cent interest on cash withdrawals. If you withdrew €4,000 in cash with the Platinum card while splashing out on holidays abroad, but did nothing to clear off this bill over the next year, the interest alone after one year would add up to a whopping €1,027, according to Ronan Coburn, founder of the banking consultants, The Bottom Line.
Other cards that are particularly expensive for cash withdrawals are Ulster Bank's Classic and Zinc cards -- which both charge 22.9 per cent interest -- and the Halifax credit card, which charges 21.6 per cent interest.
As enormous as the interest charged on cash withdrawals is, the interest charged on credit card purchases is also to be avoided. With rates of up to 17.9 per cent, the interest charged on a credit card purchases could be as much as seven times more than what you're paying on your mortgage. With interest rates like this, only hold onto your credit card if you pay off your bill in full each month -- as that's the only way you'll avoid paying hefty interest.
Don't fall into the minimum payment trap -- where you essentially pay a tiny amount (usually between two and three per cent) off your credit card bill each month. Let's say you owe €4,000 on your credit card and that the interest being charged is 23.4 per cent. If you only pay three per cent off that bill each month, it could take you 26 months to clear it -- and you'll still have a €2,471 interest bill to repay, warns Coburn.
Don't assume that when you repay money off your credit card bill, the items on your bill with the highest rates of interest will be the first to be cleared. In a lot of cases, it will be the items with the lower interest rates -- such as card purchases or bills transferred from another credit card -- that are cleared off your bill first, while those with the more expensive interest -- such as cash withdrawals -- are cleared last. If you're struggling with credit card repayments, your credit card provider could almost double the interest rate on your card. MBNA, for example, usually charges between 14.9 and 16.9 per cent interest on credit cards. However, it could increase the interest charged on your account by up to 25.9 per cent if it considers you 'high risk' -- that is, likely to fall behind on your repayments.
"Among those paying the highest interest charges are those who are already heavily in debt with credit card limits maxed out," said Coburn. "Many of these are casualties of high pressure salesmanship when they were mis-sold their credit card in the first place."
INTO THE RED
Think twice before heading to the ATM machine when you're not sure if you've any money left in your account.
If you take more out of your current account than you have in it, you could pay almost 26 per cent interest on money withdrawn. If you go into the red regularly, make sure you have permission from your bank to do so. The interest on authorised overdrafts is high -- but the interest charged on unauthorised overdrafts could be twice as much.
AIB, for example, charges 13.94 per cent interest on authorised overdrafts and the interest charged on unauthorised overdrafts is a whopping 25.94 per cent -- which works out higher than the interest charged on many credit cards.
Ulster Bank charges 13.55 per cent interest on authorised overdrafts and 22.55 per cent interest on unauthorised overdrafts; National Irish Bank charges 11.43 per cent interest on authorised overdrafts under its Easy account but 20.43 per cent interest if the overdraft isn't authorised; Permanent TSB charges 13.6 per cent interest on overdrafts run up on Switch current accounts and 25 per cent interest on unauthorised overdrafts.
If you go overdrawn with Bank of Ireland, it charges 13.7 per cent interest, whether the overdraft is authorised or not.
Even if your overdraft is authorised, use it as little as you can -- and clear any overdraft as soon as you can. If you were overdrawn by €2,000 for a year and the interest charged was 13.94 per cent, the interest clocks up to €289 after one year, according to Coburn. Had you been clever and taken that €2,000 out as a personal loan instead, you could easily have cut that interest bill in half.
For example, some credit unions offer one-year personal loans with interest rates of 5.05 per cent. At that rate, the interest on your €2,000 borrowings would come to €54 after a year -- about a fifth what you paid on the overdraft.
DON'T GET CAUGHT OUT WITH YOUR MORTGAGE
As mortgages can be snapped up at interest rates of below 2.5 per cent, they can be one of the cheapest ways to borrow money -- as long as you get the right lender and rate. Yet as many homeowners have six-figure mortgages that stretch over 20 or 30 years, your home loan could be the biggest financial noose around your neck.
If you bought your first home about three years ago, you could have borrowed about seven times your income. Although house prices have fallen since, first-time buyers are still buying houses that are about four-and-a-half times their income, according to the latest EBS/DKM Affordability Index.
Tracker mortgages are among the cheapest around but as lenders pulled their tracker mortgages more than a year ago, today's first-time buyers must sign up to standard variable or fixed rate mortgages. Unlike tracker mortgages, standard variable mortgages do not guarantee to track or pass on cuts in the ECB rate.
Only last summer, Permanent TSB increased its standard variable rate by 0.5 per cent and the lender is expected to hike the rate by the same amount again next month. Other lenders are expected to follow suit.
With this in mind, if you managed to snap up a cheap tracker mortgage, hold onto it for dear life. Otherwise, you could end up paying tens of thousands more in mortgage interest.
If you're buying your first home, do your utmost to get a mortgage from a cheap lender -- even if that means saving a massive deposit for your house. If you can borrow only half of the value of your home, you could get a variable mortgage of 2.28 per cent from AIB. If you go to Halifax, you'll pay 4.39 per cent interest -- almost twice the AIB rate. The difference to your pocket after 20 years will be huge.
If you borrowed €200,000 at AIB's 2.28 per cent rate, your interest will add up to €61,872 after 20 years, according to the Financial Regulator. But if you borrow the same amount at Halifax's 4.39 per cent rate, the interest adds up to €126,862 after 20 years.
FLAT RATE ALLOWANCE
Last week, we wrote that a clerk who works with the civil service is entitled to a flat rate allowance of €142. It is in fact clerks of works who are entitled to that allowance.