Card usage not getting the credit it deserves
Credit cards are generally considered a symbol of financial irresponsibility, often becoming a drain on the household budget.
This is not necessarily the case and if used correctly may even be beneficial. The problem is that they are the most widely and easily available form of credit, which is worrying, considering six out of 10 credit card users don’t know the interest they pay on their credit card bills.
Also, credit cards are one of the most expensive ways to borrow money - the interest could be as much as eight times the average interest paid on one’s mortgage.
According to the Central Bank, there was about €11.3bn spent on credit cards last year. To put this in context, Irish people use debit cards five times more. The Central Bank’s statistics show that whilst credit card transactions are rising, the increase in debit card spending is increasing quicker. While people are spending more in restaurants and shops, most are opting to pay with debit, rather than a credit card and 72.2% of expenditure abroad is with a debit card.
As part of my role as a financial adviser, I focus on people’s spending and ways to reduce their monthly outgoings. This includes reducing the cost of payments, which includes large ones such as mortgage payments.
There is a lot to be saved by doing this but reducing the interest on loans, particularly credit card loans, which carry the highest rate of debt is normally my priority. I have had a few clients who have had issues with credit card debt but I do also have a cohort of clients who do use their credit cards to their advantage.
They do this by always avoiding paying any interest on their credit cards by only using their card when buying goods and services — as opposed to using it to withdraw cash — and paying off the bill in full by the date it is due to be repaid.
This is possible because most credit card providers have an interest-free period. If, however, one doesn’t repay their bill on time, they get hit with credit card interest from the date they bought the items. Credit cards can also give valuable legal protection, such as if the company you buy a product from goes bust or doesn’t deliver what’s promised. You are generally able to claim a refund from the credit card company.
There are some other incentives but these are fairly small. For example, Bank of Ireland allows card users to build up Aer Lingus points as they make purchases, while KBC offers up to €10 cash back on some purchases. This is not enough to make you change the way you bank, or shop for that matter. It is, however, another small way in which you can make your credit card a contributor, rather than a drain, on your personal finances.
When it comes to interest, the most expensive is Bank of Ireland’s Aer credit card as it charges 26.6% interest on purchases. The second-highest interest rate on credit card purchases is 22.9% and this is charged on a number of cards, including AIB’s ‘be’ cards, An Post’s ‘Money’ card, and Avantcard’s ‘One’ and ‘Reward plus’ cards.
People in trouble with credit card debt often owe as much as €35,000 on their cards and have multiple credit cards open at the same time.
This is precisely part of the problem — there is no restriction on the amount of cards you can have. One option is to look at transferring a credit card debt from a high-interest card to a new card which charges no interest for a certain amount of time. This can be a step in the right direction, but only if you have a plan in place to clear the debt by the time the interest-free period is up.
- Nick Charalambous is an independent financial advisor for Alpha Wealth, which has offices in Cork and Dublin.
