Scrooge haunts Christmas borrowing

For shopping sprees, overdrafts may be a better option than credit cards, writes Laura Slattery, not least because the limits tend to be stricter than ith cards.

If ever there's a time for seemingly compulsory, guilt-free splurging, it's Christmas.

But while every retailer in the country will be praying for you to abandon any self-imposed or budget-prescribed spending limits, don't assume your credit card provider will join in the spirit of goodwill.

It's all too easy to amass what the Irish Financial Services Regulatory Authority (IFSRA) calls "stubbornly high" debts - debts that never seem to get paid off even if you keep bumping up your monthly repayments.

Christmas is a reliable annual trigger for such debts, with everything from factory quantities of biscuits to Bratz dolls conspiring to rip a hole in the heart of family finances.

Haven't got enough cash in your wallet to pay for that fibre optic tree? The simplest solution is to whip out your gold card and just sign.

Almost two million credit cards are in issue in the Republic, and they can be great for the shortest of short-term borrowing, giving cardholders interest-free credit for up to 56 days.

However, if bills are not paid in full by the due date, interest starts to pile up at rates as high as 18.9 per cent APR. Pretty soon you end up paying interest on interest and the debt spirals.

And credit card providers have become increasingly Scrooge-like over the past few years, increasing their profit margins by charging an even higher percentage over the European Central Bank (ECB) base interest rate, according to an IFSRA study.

Authorised current account overdrafts could be a much better option for consumers determined to treat themselves to a Christmas on credit, with rates as low as 10.8 per cent available.

Overdraft limits also tend to be stricter than credit card ones, making them the less dangerous option for discipline-free consumers just warming up for their December spree.

But for big spenders, becoming a "rate tart" could be the best choice. Rate tarts are credit card users who jump from card to card, selecting the one with the lowest introductory interest rate then ditching it when the deal expires in favour of another special offer.

Despite the fact that this promotes competition and means organised, savvy consumers can escape punitive interest rates, the Government currently discourages rate tarts by levying €40 stamp duty on each credit card held by a consumer in any one year.

But this €40 tax is often cancelled out by the savings consumers can make by switching to a card with a 0 per cent interest rate on purchases for six months.

For example, people with an average balance of €3,000 who switch from AIB's standard Classic card to Tesco Personal Finance's Classic card will save €313 over the course of a year, according to Tesco.

This is because the AIB Classic card has a standard interest rate of 18.9 per cent APR, while Tesco offers a 0 per cent interest rate on new purchases and transferred balances for six months, after which time the rate reverts to 14.9 per cent.

People with a minimum salary of €30,000 can do even better if they switch to Ulster Bank's zinc card, which has an introductory APR of 0 per cent for nine months and a normal rate of 12.9 per cent.

The cheapest normal rate in the market is 11.9 per cent on the National Irish Bank (NIB) gold card, however its 0 per cent offer only lasts for five months.

The only other credit card provider to offer a 0 per cent rate on new purchases is Bank of Ireland. Its introductory rate of 2.9 per cent on transferred balances lasts for up to 12 months.

Like Ulster Bank, Tesco and NIB, AIB offers 0 per cent on balance transfers (although not on new purchases).

These offers may come into their own in January, when people suffering from seasonal spending hangovers try to repair the damage.

But balance transfer rates only apply to the debt moved to the new card. Unless the card provider has a corresponding 0 per cent rate on new purchases, the rate of interest on any New Year pleasures paid for by plastic will be the standard double-digit one.

Usually, any repayments cardholders make will be taken off the balance transfer sum first, with new purchases racking up interest at the higher rate until the transferred money is cleared. So unless spendthrift cardholders reform their ways, the balance transfer rate can expire well before the five to nine months of the offer are up.

AIB adopts a more honest approach: it credits lodgements against cash advances and purchases before it eats into the transferred balance.

This leaves cardholders better off, as they are guaranteed a 0 per cent six-month comfort zone on the debts they have built up, regardless of how many new purchases they make.

The downside to the AIB cards is that - unlike Ulster Bank, Tesco, NIB and Bank of Ireland - they do not offer a 0 per cent rate on new purchases.

Around half of all cardholders pay off their outstanding balances in full each month, with many setting up direct debits to automatically repay the total amount.

For consumers who use their credit card like a charge card in this way, it doesn't really matter what APR is on their card, because they will never be charged interest.

But the other half are exposing themselves to high interest rates as well as hidden charges like late payment fees and unpaid item fees, which are charged when the cardholder defaults on a direct debt, standing order or cheque payment.

IFSRA's new survey of the credit card market reveals significant differences in the treatment of cardholders who spend beyond their capacity to repay.

MBNA is by far the least tolerant card provider, charging €15.24 for each late payment, compared to just €3.81 at AIB. Three card providers - Bank of Ireland, National Irish Bank and Permanent TSB - do not even have such a charge.

In addition, MBNA cards, which are also sold through One Direct and Ryanair, charge a punitive €19.05 for unpaid item fees. Other providers charge €3.17-€8.50.

MBNA cards are also a bad choice for people prone to falling into what IFSRA calls the "minimum payment trap".

Card providers demand that customers repay 2.25 per cent, 5 per cent of their outstanding balance each month.

MBNA is at the bottom of this scale, requiring a monthly repayment of only 2.25 per cent of the balance. Cardholders are effectively being encouraged to accrue interest charges on a higher proportion of their balances.

Lower minimum repayment percentages do give people more financial flexibility, but they mean that debts can take longer to repay, IFSRA warns.

According to its survey, if an MBNA cardholder only makes the minimum required repayments on a debt of €4,000, misses the due date three times and incurs one unpaid item fee, he or she will make a dent in the debt of just €23 after 12 months.

So cardholders with profligate spending habits at this time of year will clearly do well to put the speedy obliteration of card debts at the top of their New Year resolutions list. Otherwise, they could be facing the scary prospect of owing as much as €3,977 on a €4,000 debt by the time Christmas 2005 is upon them.