Flexible friend that can be your worst enemy

There are a number of steps you can take to bring your credit card debt under control

IF YOU BUY a television for €1,000 today using your credit card and only make the minimum monthly payments on your card, it will be 2018 before you clear the debt and, once the interest is totted up, it will have cost you over €1,500.

That luxury once-in-a-lifetime holiday to the Maldives, meanwhile, which cost €10,000 back in the good old days when you had more money (or at least more access to credit) than sense will take over 20 years to clear and will cost almost €9,000 in interest.

Yes, we know that credit cards are handy but they can also be one of our worst enemies, one which creates a mountain of debt that can take a lifetime to climb.

While the collapse in the economy has meant that overall debt levels have declined, credit card debt remains high – according to debt counselling service MABS, the average credit card debt for a client was just over €8,000 in 2009.

There are things that can be done to bring it under control and, if you understand how credit card companies work and apply some simple tools, you may be able to prevent that little spending habit from leading you into serious financial difficulties.

Credit card companies are not run by stupid people and they only request tiny amounts as a minimum monthly re-payment – all MBNA wants is the greater of €25 or 1 per cent of your statement balance while Bank of Ireland requires the greater of €5 or 2.5 per cent of the balance – because it makes them money. These minimum payments are not in your interest and, by only paying the monthly minimum, you can increase the length of time it takes to clear a debt and the level of interest paid by over 300 per cent.

One of the cheapest credit cards on the Irish market comes from AIB – its Click card has an APR of just 8.5 per cent. While this might be very economical when purchasing, it is not without drawbacks.

For example, it charges a 23.4 per cent interest rate on cash withdrawals, one of the highest rates in the market, and even charges a cash advance fee of 1.5 per cent when your account is in credit.

Moreover, if you wish to pre-fund your account before travelling to the United States, for example, AIB will still charge you 2.75 per cent for currency conversion when you withdraw dollars as well as a cash advance fee of 1.5 per cent. It also has a salary requirement of €25,000, compared to other cards such as Bank of Ireland’s Clear card, which only looks for €16,000.

If you are one of the many Halifax customers soon to be relieved of your credit card, you may need another provider to whom you can transfer your outstanding balance. Or, if you’re paying too much interest on your existing card, you might be considering switching to a lower rate card to help you get a head start on your debt.

Your best option is to switch to a card which offers a 0 per cent rate on balance transfers, although you should note that lenders are tightening up their criteria so, if you have recently lost your job or your employment situation looks precarious, you may not be accepted by another credit card provider.

If you do transfer your balance, a number of providers are offering introductory interest-free periods. Tesco will give you 0 per cent on transfers and Tesco purchases for the first six months, MBNA Platinum is offering 0 per cent on balance transfers for the first 10 months, as is the EBS.

Switching can lead to significant savings, very swiftly. For example, if you switch your outstanding balance of €10,000 from a card with an APR of 16.5 per cent to Bank of Ireland’s Clear card paying 0 per cent, you would save almost €850 in interest payments in the first six months alone. Keep this up by switching again at the end of the introductory period and you could make a serious dent in your debt.

However, if you intend to continue spending with your credit card, thereby adding to your overall debt, any payments you make will be used to pay down the cheaper debt first. So, if you transfer a balance of €10,000 at 0 per cent, but make additional purchases of €300 charged at the normal rate, then any payments you make will pay down the €1,000 balance first, thereby lengthening the term of the €300 loan.

Unless your account is in credit think twice about withdrawing money from your credit card at the ATM. While it’s a useful tool when travelling abroad, if you withdraw more than the account is funded with you could be looking at some steep charges. AIB charges 1.5 per cent (minimum €1.90) on the value of the transaction on its Platinum card, which means a €1,000 withdrawal results in a charge of €15, on top of interest. And, if you withdraw money outside of the eurozone, you can expect an additional currency conversion 1.75 per cent charge in Europe, and 2.75 per cent in the rest of the world.

The great advantage of a credit card – provided you abide by the rules – is that it grants you a certain period of interest-free credit, normally 56 days.

Go over this period, however, and you are looking at some serious consequences. If someone spends €435 on a holiday and plans to pay it off in full within the interest-free period but instead rounds up the bill and pays off just €400, rather than the full amount, then the interest is still charged on the full amount, not the outstanding balance, and from the date of purchase.

If you make your payment late, you will also feel the pain of high interest rates. In the above example, if you intend to transfer €435 into your credit card, but leave it a few days late, not only will you be hit with a late-payment charge – MBNA, for example, will charge you €15.24 – but you will also pay interest on the full amount from the date of purchase.

Unlike other loans, whereby you only pay interest for the amount of days you were late with your payment, with a credit card you will be hit with a charge for the 56 days and the number of days you were late by. And, if you accidentally go over your limit, you will be hit with additional charges. MBNA, for example, imposes a €12.70 late charge at MBNA, while Permanent TSB has a fee of €7.50.