By picking a card or deal that best suits your needs you can reduce the cost of credit card debt, writes FIONA REDDAN
IT’S CONVENIENT, easily accessible, and only has to be repaid in small amounts each month. Unsurprisingly therefore, as the recession continues to bite, people are still relying on their credit cards to carry them through tough patches. Indeed despite – or perhaps because of – the radically changed financial circumstances that many people now find themselves in, the average outstanding debt per credit card in Ireland has fallen by just 6 per cent since the heady days of 2008 when it peaked at €1,350.
So if you’re one of those people whose “flexible friend” has become more of a “fiendish foe”, what do you need to know to change your situation?
CHASE THOSE 0% DEALS
If you have a sizeable outstanding credit card debt, it could be time to move to a credit card provider that offers 0 per cent for a limited time. Doing so is one of the easiest ways to cut your debt down to size – provided that you put your card on ice and make monthly repayments. For example, if you have outstanding debt of €5,000, by switching to a 0 per cent provider for 10 months it will save you €708 in interest payments. And if you switch again, you’ll continue to save.
MBNA currently offers 0 per cent for 10 months if you switch to its Platinum card, or 1.9 per cent for six months on its standard card. Similarly, An Post’s One Direct card, which is also issued by MBNA, offers 0 per cent for 10 months. Both Tesco and Permanent TSB also have a zero rate for six months.
CONSIDER A PRE-PAID OPTION
The advantage of a pre-paid credit card is that you can’t spend what you don’t have. The disadvantage is that in times of need, it won’t give you money that isn’t already in your account.
There is a variety of options on the market, including the O2 money card. You can top this up online, in any O2 store or wherever you see the Payzone symbol. It can be used wherever Visa is accepted – which is almost everywhere. It is also useful for online shopping. It does come with a charge however, of €4.99, while topping it up will incur a charge of between €0.39 and €2.99 each time.
Another alternative is to look for a Visa debit card, from a provider such as Ulster Bank, which works much like a laser card in that it withdraws money directly from your current account. This makes it easier to keep on top of your spending – and won’t see you incur any hefty interest charges. On the other hand, it isn’t much use if you find yourself stuck in another country, with an empty account and pay day a few days away.
And with summer on the way, you may be looking to book your holiday flights online. Doing so will incur a charge however, unless you book with Ryanair and use its new Cash Passport to do so. Using this new card will mean you avoid the €6 administration fee charged by the airline, and while it attracts a €10 fee to obtain, you will receive a €10 flight voucher to be redeemed against your next flight. Money can be withdrawn from the card or used wherever MasterCard is accepted, but like O2, there is a charge each time you put money on the card, of €3. Moreover, a negative balance charge of €15 also applies should you go overdrawn.
TO PROTECT OR NOT TO PROTECT?
If you’re taking out a credit card for the first time, or are applying for a new card, you might be offered payment protection insurance (PPI) by the provider. But should you accept it?
PPI is an insurance policy that is aimed at covering repayments should you be unable to meet them. But many policies are riddled with exclusions, such as unemployment, which means that they may be of little value to you. They can also be expensive. For example, for a credit card the cover usually costs about 70 cent per €100 outstanding each month. So if you have €10,000 in outstanding debt, it could cost you a hefty €70 a month. And if you usually pay off all your credit card balance each month and take out PPI, you may be paying for cover that you don’t need.
Moreover, numerous cases where people were unaware that they had bought the product have also recently come to light.
If you feel that you were mis-sold a payment protection product, you should in the first instance contact the relevant financial institution. If this doesn’t work, you can then bring your complaint to the Financial Ombudsman. There are also a number of private operators who promise to get your money back for a fee.
PICK A CARD THAT SUITS YOUR NEEDS
If you tend to rack up sizeable balances on your credit card, then you will need to shop around for the lowest interest rate. Apart from the introductory offers mentioned elsewhere, the lowest current rate available for purchases is 13.6 per cent from AIB’s Click card – which compares well with 22.7 per cent for a MasterCard from the same bank.
If, however, you always pay off your bill each month, then how much interest is being charged isn’t really important. Instead, you need to make sure that you’re not being charged any extra charges.
With Bank of Ireland’s Platinum Advantage card, for example, an annual fee of €76.18 applies, while National Irish Bank’s Platinum MasterCard is only available to customers with a Prestige Current Account – and this account attracts a €31 quarterly fee.
If you like to withdraw funds from your credit card when short on cash, then you might find a different card best suits your needs. National Irish Bank’s MasterCard Platinum, for example, charges just 9.75 per cent for cash withdrawals, compared with Bank of Ireland’s Clear card which has a 21.36 per cent rate.
Your annual income may also preclude you from applying for particular cards. For example, to apply for Ulster Bank’s Gold MasterCard you need a minimum salary of €30,000, or €50,000 if you’re a new customer of AIB’s Platinum card. On the other hand, Tesco Finance just requires income of €7,500 to qualify for its credit card.
FORGET ABOUT THE MINIMUM PAYMENT
It sounds like a good deal. You get to borrow €5,000 and you only have to pay back 5 per cent, or €250, a month. So that once in a life-time trip to Australia sounds sensible right? Wrong!
If you borrow that much money and only make the minimum payment each month, it will take you over 10 years to pay back the loan – for some people that’s almost half a mortgage. Not only that, but the total cost of the holiday will come to almost €7,000 – or 40 per cent more expensive than if you hadn’t used your credit card to fund your trip.
Bank of Ireland only requires a repayment of 2.5 per cent a month, for example. Remember, the minimum payment was created by banks and credit card providers to make themselves more money. Not to help you.
GET “REWARDS” ON YOUR SPENDING
As long as it doesn’t encourage you to spend more just so you can benefit from the rewards, earning little extras as you spend can be attractive. With Tesco’s credit card, for example, you can earn one Clubcard point for every €1 spent, plus one extra point for every €2 spend. Once you’ve collected 150 points, they can be converted into a Clubcard voucher worth €1.50, which can be spent on everything from groceries, to meal vouchers to magazine subscriptions.
And with AIB’s Platinum Visa card, you can earn 0.5 per cent cashback on purchases over €5,000 (up to a maximum of €50,000) in a 12-month period. Moreover, department store Brown Thomas has a storecard which allows you to earn reward points every time you use the credit card in either Brown Thomas or one of its partners.
However, with MBNA undergoing a change of ownership, other reward schemes are being affected. The acquisition, by US private equity group Apollo, is due to close in the first half of 2013, but already it has pulled out of some of its affinity relationships. Previously, for example, users of the Pigsback credit card, which is issued by MBNA, were able to earn "Piggypoints" with the card, which could be used for purchases on pigsback.com. However, this arrangement ended on March 1st, although according to pigsback.com, it is looking to partner with another credit card provider.
Similarly, AXA, which also ran a rewards scheme, has ended its agreement with MBNA, while Ulster Bank ended its YourPoints programme for new registrations last year.
DITCH YOUR DEBT
If you’re struggling to repay a long-standing credit card debt, the National Consumer Agency (NCA) has launched a new guide aimed at helping you achieve this goal.
Some of its top tips include the very obvious – but possibly the most difficult – task of simply stopping using your credit card. After all, the quicker you stop adding to your bill, the quicker you will be debt-free.
The NCA also recommends that you ask your credit card provider if they will consider reducing the interest rate levied to your debt – one phone call could save you a bundle, and it never hurts to ask.
The NCA also recommends that you ask your credit card provider if they will consider reducing the interest rate levied to your debt – one phone call could save you a bundle
