Tuesday 17 September 2019

Change cards to help relieve your festive spending hangover

Sort out your priorities regarding credit card debt before finding a better provider, writes John Cradden

Most credit cards give up to 56 days interest-free credit and as long as you pay off your balance in full and on time each month, you’ll be charged no interest
Most credit cards give up to 56 days interest-free credit and as long as you pay off your balance in full and on time each month, you’ll be charged no interest

Credit card spending has been falling here for some time thanks to a big shift towards the use of debit cards, but the temptation to use a credit card to get through Christmas season is too hard to resist for many.

Central Bank figures show while the value of all debit card transactions (including ATM transactions) is now around five times that of credit cards, credit cards accounted for 45pc of all point-of-sale purchases during the third quarter of 2018. The figures also show that spending on credit cards is rising again - albeit not as fast as debit cards.

"The biggest mistake people make with credit cards over Christmas is becoming emotional about spending," said financial literacy expert and founder of Money Whizz, Frank Conway. Some will plan their spending and budget accordingly, but for others "the big problem they run into is not always fully appreciating that credit cards are loans... and they can be expensive depending on how they use them... or don't use them."

Credit cards can actually be great value for money provided the outstanding balance is repaid before the due date, he says. Most credit cards give up to 56 days interest-free credit and as long as you pay off your balance in full and on time each month, you'll be charged no interest.

"Otherwise, interest charges and even penalties can become a cost that adds to the original balance, and this is where the enormous cost of compound interest kicks in."

So if you're sure you need to bolster your courage before looking at your credit card bill this month, what can you do to lessen the financial hangover?

With credit cards interest rates ranging from 14pc to 23pc, paying off as much as you can each month until the debt is clear should be the main strategy, but even paying the minimum amount is better than missing repayments, as it may affect your credit rating and you may have trouble accessing credit or even getting a mortgage in the future, says Daragh Cassidy of price comparison site bonkers.ie.

If you have more than one credit card or loan, then you should be paying off the debt with the highest interest rate first, as this is what's costing you the most.

"You can also choose to pay off the debt with the lowest balance first as this will fully clear the debt for you and help you psychologically," says Cassidy. "But this really only works if there's a small balance that you can quickly get rid of - otherwise you're paying off the cheaper debt and keeping the expensive debt."

Don't be afraid to use your savings to deal with debt, too, particularly as bank savings account rates are so dire. "It's amazing how many people in Ireland have debt even though they also have savings," says Cassidy.

"So if you have money saved up in the bank or credit union, consider using that instead to pay off your debt as quickly as you can. The interest you'll be charged on your debt will be far greater than any interest you'll earn on your savings."

Switching to a credit card provider with a lower rate than your current card can be a good way to save you money on your interest payments and get a handle on things if you're trying to repay a large amount of credit card debt, but Conway warns that there is not always a guarantee that you can qualify for a new card.

"But if you do switch, make sure it's not just for the intro 0pc deal, as some of the credit card offers on the CCPC (Competition and Consumer Protection) website charge up to 22pc APR, so if you can't afford to repay the balance, then the card might cost the user a lot more if they only make the minimum monthly payment," he says.

The card with the lowest rate by some way is AIB's Click Visa card at 13.8pc APR, although there is no scope to transfer balances from another card, nor is there any introductory offer. The card with the next lowest rate, AIB's Platinum, offers 3.83pc on both balance transfers and purchases for 12 months, while KBC's Cash Reward offers 18.25pcAPR and 0pc on balance transfers.

Ulster Bank, Bank of Ireland, Avantcard and Permanent TSB make up the rest of the rankings according to interest rate, which range from 19.2pc to 22.7pcAPR, with AIB's Be Visa card topping the table for the highest rate at 22.9pcAPR, with 3.83pc on balance transfers and purchases for 12 months.

Conway adds that with rates like these, it might be cheaper to take out a debt consolidation or term loan and pay it back over a one- to two-year period at a lower interest rate, but if you don't qualify for a debt consolidation loan with your bank or credit union, then aiming to repay the card debt in six or 12 months would be the next best strategy.

But how big should the bill be before you consider a loan to pay it off? Cassidy says it's possible to take out a loan for as little as €1,000 with most banks and to pay it back over a period of as little as six months, if you choose.

"Taking out a loan, however small, should definitely be considered before you choose to put something on the credit card. As a ballpark, for anything over €1,000 that you're going to repay over six months or longer, you should look into a personal loan or chat with your local credit union," he says.

It's worth noting that all of Bank of Ireland's Mastercard credit cards (except the student version) have an 'instalment plan' feature which acts like a personal loan through your credit card.

The feature allows you to transfer a credit card purchase over €500 onto a separate lower interest rate of 6.9pc APR (a lower rate than most conventional personal loans) and to pay it off in 12 equal monthly instalments. It is currently the only bank to offer this feature in Ireland.

You could also consider using pre-paid cards, whereby you load the card with funds that you can use to pay bills, make purchases and withdraw cash.

If you use a credit card frequently for online purchases, for the future you might consider not clicking the box on payment pages that allow to 'save' or 'store' your credit card details for the next time you purchase.

"This is the basics of smart shopping," says Conway. "The reality is that most people want convenience but research shows time and time again that the process of delay helps people consider their buying needs. There is some research from Sweden that alludes to the benefits of delayed purchases and certainly some of the comments I have seen from Sweden is that seamless or contactless buying makes money management more difficult.

"So, stop and take a step back to keep your balance in the black," he says.

How to switch... credit cards

STEP 1 Check out the competition on price comparison sites or the website of the Competition and Consumer Protection Commission (CCPC.ie). This is particularly important if you have a balance to transfer.

STEP 2 Apply for a new credit card -online or in a branch. You have to be over 18 and have a minimum annual income, often set at €16,000 per year. You'll need the following details: your bank info, current credit card, loans and savings accounts, mortgage (if any), current account and income.

STEP 3 Close your old credit card account. Cancel any direct debits on your old account. Write to your old credit card company requesting the account to be closed and your card to be cancelled. If you've paid stamp duty in 2018, they will send confirmation that your account is closed and you can send this to your new credit card company to avoid being charged stamp duty twice in one year. And don't forget cut up your old card. Savings detailed below are based on clearing a €2,500 balance at €250 a month.

Irish Independent

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