No credit for burying one's head in the sand over card debt
Back in April, I wrote in this very paper about credit cards and while I wasn’t advocating their use, I explained how they could be used to someone’s advantage if managed very tightly.
Having spoken to a number of clients since, I would warn strongly against their use.
I stand by my comments three months ago - that they should come with a health, or wealth warning, as there are many terms and conditions to look out for. As with most financial products, the devil is in the detail, in this case in the small fine print.
It is so easy to fall foul of these terms and get caught for additional fees, such as late penalty and cash withdrawal fees unknowingly. Most of us realise that credit cards carry a high rate of interest.
However, a lot of us don’t realise the average interest on these cards is a whopping 20% per annum. This means if your average card balance is €1,000, that you will suffer €200 interest a year.
If you pay €50 each month at an interest rate of 17% per annum - which is the lowest on the market - it will take two years to repay the balance, provided you stop using the card.
If you increase your repayments to €100 per month, you could clear your balance in 11 months.
Those of us who do not use a credit card might be wondering why anyone would use them given the extortionate rates of interest charged which can be as much as 15 times that of your mortgage or five times that of a personal loan.
The main reason is that humans are generally short natured in our approach to things.
We see the short term advantages of the card and the feel good of what it does for us such as buying new clothes or paying for a holiday, rather than the negative feelings of having to pay back the "loan".
To put this in context, when it comes to interest being charged, the most expensive is Bank of Ireland’s Aer credit card as it charges 26.6% interest on purchases. The recession meant many of us were forced into short term credit and once in it, it is very hard to get out of.
Also, the banks are in business to make money and having worked in banks for over ten years, I witnessed rewards given to those who sold the most amount of credit cards. They were big money makers for the banks.
So, what can one do in this situation? It would depend on the extent of the balance on the card. If relatively small, then through some thriftiness it shouldn’t be too difficult to pay off the balance and cut the card in half.
Another short-term 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.
If the balance is more than three month’s pay, then I would suggest considering looking at cheaper forms of credit such as a personal loan or topping up a mortgage.
A big sign of a more serious problem is using the card to withdraw cash.
This is seriously expensive. Getting sound financial advice is important and one of the options is the Money Advice and Budgeting Service (MABs) which is the State's money advice service, guiding people through dealing with problem debt.
A personal insolvency practitioner - a type of debt adviser - would be an option also if you’re in serious credit card debt.
There may be solutions open to you which you didn’t expect, such as getting the interest and charges on your credit card frozen.
Independent financial advisors are another avenue and sometimes it is worth speaking to the bank in question to see what they would suggest and asking outright if they would consider reducing the interest rate.
The big takeaway from this article is not to bury your head in the sand.
