Ensuring credit cards don't come at a price

There are many costly pitfalls associated with using a credit card, but they can be avoided, writes CAROLINE MADDEN

BRITISH PRIME minister Gordon Brown recently announced plans to crack down on “sharp practices” being used by credit-card operators in Britain. The practices range from issuing unsolicited credit-card cheques to raising credit limits without being requested to do so by the customer.

Brown was following in the footsteps of US president Barack Obama, who in May signed a new “credit-card Bill of rights” to protect consumers from shady practices including unfair interest-rate hikes.

Our own Government may have its hands full with other pressing issues, but should it take similar steps to stamp out unsavoury tactics being employed within the credit-card industry, or are Irish consumers already adequately protected?

The 2007 Consumer Protection Code outlaws a number of practices that have caused problems in the US and UK. For example, the code requires that regulated credit-card providers must not offer unsolicited pre-approved credit facilities, and they may only increase a consumer’s credit-card limit following a request from the consumer.

But on the issue of interest rates, the code only specifies that when a credit institution announces a change in interest rates, the notification must clearly state the date from which the change will apply. There is no requirement relating to the amount of notice that must be given to consumers, and there is no limit on the maximum interest rate that can be charged on credit cards.

So how does it work in practice? MBNA, one of the largest credit-card providers in the State, periodically reviews the credit risk across its portfolio and changes interest rates based on those reviews, taking into account a customer’s performance as well as other external factors.

“If we raise a customer’s rate based on risk, we notify them 60 days in advance and they can reject the new rate and pay off the outstanding balance at the existing rate,” a spokeswoman for MBNA says.

However, there are still several legitimate practices that can prove costly for the holders of the 2.19 million personal credit cards in issue in Ireland. Here we highlight the top five traps to avoid when using your flexible friend:

1. Tread carefully with promotional rates

If your credit card is groaning under the strain of too many impulse buys, those “0 per cent introductory offer” advertisements from other banks can sound like the magic solution to all your problems. However, there are pitfalls to watch out for.

Firstly, these 0 per cent interest-rate offers usually apply only to the balance transferred from your old credit card. Any new purchases or cash withdrawals using your shiny new card will almost always be subject to a higher interest rate.

Secondly, these are introductory offers and expire after a number of months. Unless you succeed in paying off your old debt in full before the end of the offer, you will generally move on to the standard rate for purchases.

Thirdly, the introductory rate can be cranked up to a higher rate if you breach the terms and conditions of the card, for example if you make a late payment or exceed your credit-card spending limit.

Take, for example, the new MBNA Platinum Visa card currently being advertised. The 0 per cent introductory rate only applies to balance transfers for the first 10 months. A variable 14.9 per cent annual percentage rate (APR)applies to new purchases. And the terms and conditions contain this important warning: “The promotional rates will be withdrawn if you go overlimit or overdue during this period.”

With Bank of Ireland’s Clear credit card and Permanent TSB’s Ice card, the 0 per cent balance transfer rate expires after six months. Furthermore, according to the terms and conditions of the Clear card, Bank of Ireland may vary the balance transfer rate. The only guarantee is that it will always be below the standard interest rate charged for purchases.

With Postbank’s standard credit card, you can only access the 0 per cent introductory rate if you apply online.

2. Know your rates

It may seem confusing but it is important to familiarise yourself with the different interest rates that apply depending on what you use your card for. There may be an introductory rate, as discussed above, which – usually – applies solely to the balance transferred from an old credit card. Then there is the rate that applies to new purchases, which ranges from 8.5 per cent APR to almost 18 per cent APR depending on the card.

A much higher interest rate usually applies to cash withdrawals. A good rule of thumb is to avoid using your credit card to withdraw cash at ATMs, unless you have no alternative. Depending on the card in question, the interest rate can be almost double the rate that applies to purchases. For example, AIB’s Click visa credit card offers an attractive variable interest rate of 8.5 per cent on purchases, but it soars to 23.4 per cent APR on cash withdrawals.

You may also be charged a transaction fee every time you make a cash withdrawal with your credit card, depending on your provider. AIB applies a cash advance fee of €1.50 or 1.5 per cent of the transaction fee, whichever is greater. MBNA also applies a 1.5 per cent handling fee (with a minimum of €1.90 and a maximum of €31.74) on over-the-counter and ATM transactions with its Platinum card.

“Some providers charge this fee even if you have already paid enough cash into your account to cover the withdrawal amount,” the Financial Regulator warns.

In general, you receive a grace period – typically 56 days – before interest starts clocking up on your credit-card purchases. However, most providers do not extend this interest-free period to cash withdrawals, so you will probably have to pay interest from the time you make the withdrawal.

If all of the above is not enough to deter you from whipping out your credit card the next time you pass an ATM, then you may want to familiarise yourself with what is known as the “repayment hierarchy” that applies to credit cards. In general, the most expensive debt on a card is paid off last, so balance transfers and purchases are likely to be paid off before cash advances.

The trick to minimising interest is to shop around for the best-value card. Check out the Financial Regulator’s cost comparison on www.itsyourmoney.ie/cs_tab_credit_card.htm.

3. Watch out for penalties, fees and charges

If you want to avoid wasting your hard-earned cash on credit-card penalties, then you’d better get intimately acquainted with the terms and conditions of your card.

Most credit-card operators apply late payment fees if customers do not pay off the minimum amount by the due date. Several providers charge as much as €15.24 for late payments. Avoid this by setting up a direct debit.

Blowing your budget and exceeding your credit-card limit will also result in a financial slap across the wrist. Expect to pay between €6.25 and €12.70 for such an infraction. And don’t forget the potential embarrassment of having your card declined.

Watch out for cross-border “handling fees” when using your card overseas. For example, Bank of Ireland charges a fee of 1.75 per cent of the value of non-euro transactions.

4. Don’t pay duty on the double

If you switch to another credit-card provider, ensure your other account is closed. Otherwise you will be charged the annual €30 Government stamp duty on both credit-card accounts.

“Ask your old credit-card issuer for a letter of closure, which proves that you paid the stamp duty for that year,” the regulator advises. “Give this letter to your new credit-card issuer as soon as possible so they do not charge you stamp duty again.”

5. Pay off more than the minimum balance each month

The minimum monthly payment required by most credit-card providers ranges from 1 per cent to 5 per cent of the balance owed. However, if you only chip away at your debt pile with low payments each month, it will not only take years to clear your debt, but it will push up the cost of credit. For example, if you owe €4,000 and make a minimum monthly repayment of 2 per cent a month, then after a year you will still owe €3,500.

The moral of the story? It may be painful, but biting the bullet and tackling your credit-card debt as quickly as possible makes financial sense.