People who get themselves into credit card difficulties have my sympathy. They never set out of miss payments or spend up to their limit so quickly, or only pay the minimum 2.5% balance instead of the entire amount they owe.
Nearly everyone who gets their first credit card intends to use it sensibly, “just for petrol”, “only for holidays”, “for ordering on-line”; they certainly never imagine that they’ll have to use it to pay the ESB bill or groceries at the end of the month because it’s four days before payday and there literally, isn’t a penny in your purse.
Credit cards, as many of your letters to this column have revealed over the years, are considered one of your most convenient forms of money exchange, but also one of your greatest curses.
According to the latest Central Bank money and banking statistics for January 2012, at 2,126,000 there were 10,000 fewer personal credit cards in circulation in January 2012 than the 2,137,000 a month earlier in December 2011. In January 2009, as the great recession started to really take its toll, there were 2,381,000 credit cards in use.
Nevertheless, we still owe €2.781 billion in outstanding credit on our cards, down just €71,000 on December and more significantly just €285,000 less (or less than 1% of the total) than in January 2009 when we had €3.128 billion of credit card debt.
The amount of ‘flexible friend’ debt isn’t getting much smaller lower for good reason: many still hold onto their cards for the simple reason that it remains an easy source of credit at a time when incomes are falling and the cost of living is going up. For many it is their ONLY source of credit other than moneylenders.
Meanwhile the volume of debt is barely budging because credit card interest compounds at a monthly rate of on annual percentages of between nearly 14% and nearly 23%, depending on whether you have platinum or e-banking cards with all sorts of extras (like insurance and access to airport lounges) or just the ordinary plain vanilla ones that only charge extra for the government stamp duty.
The interest cost can be huge: according to credit card calculators, (see http://www.nca.ie/CreditCardReadyReckoner.aspx) if you owe €10,000, pay just a 2.5% minimum payment of €250 and make no more purchases, it will still take you six years and four months to pay off the balance at a total cost of €19,000, of which €9,000 is interest.
If you could arrange a personal loan at say, 10% interest over the same term, it would ‘only’ cost you €178.14 a month and the total cost of the capital and interest would be €13,538.96 of which €3,538.96.
(Cards that require just 2% minimum payment – such are available in the UK and USA - result in the same 10,000 dollar or pound balance, if charged at 22.7%, costing a whopping 32,000 dollars/pounds to clear over 13 years, of which 22,000 is interest.)
The ease with which we have accumulated credit card debt and the difficulty we have in paying it off means that hundreds of thousands of people are probably struggling to keep up their payments.
The credit card companies are particularly aggressive in pursuing debts and while they are now limited in how often and at what times they can contact the debtor (under the revised Consumer Protection Code) before this happens you should contact them and explain your difficulty. Put everything in writing and keep a register of all calls and emails. Prepare a financial statement – MABS can help you do this if your debt is particularly serious – and from this you will hopefully come to an affordable repayment schedule after officially “renouncing” the card and putting it out of action.
For the majority of people who are keeping their credit cards – no matter what - perhaps a review of their use and the way they are paid off is in order. Credit cards are useful and affordable but only under the following conditions:
*Ideally, the balance should be paid off every month to avoid paying any interest.
*The next best thing is to set up a standing order that pays off significant amount of the debt each month – say at least 25% of the monthly balance or a set amount that is well above the minimum payment.
*Try to use the card for specific, regular purposes only, like petrol and the weekly grocery shopping where the amount is nearly always the same and can be properly budgeted.
*For all online purchases and holidays, consider using pre-filled Visa or Mastercard money cards that limit your purchases only to the amount on the card.
*If you don’t pay off your card in full or part every month, then shop around for the best interest rates and best switching rates. (MBNA Platinum card allows 10 months at 0% interest; PTSB Ice and Tesco’s card allows 6 months at 0% while the best rate cards are AIB Click (13.6%) and Bank of Ireland’s Clear(13.8%) cards and NIB’s Platinum card at 14.38%.
*Be very careful of incurring late payment and other infractions – the penalties are steep and your credit record can also become impaired.
All card details on the Irish market can be compared on the National Consumer Authority’s website and their credit card repayment calculator can show you exactly how much interest you will pay to clear your balance over any time period.
Money Express with Jill Kerby in association with Aviva