Everyone likes the idea of buying something now and paying later. Deep down we know we will have to pay eventually, but for now we just want to buy that €150 jacket which is on sale down from €250, or book that €399 weekend break and start enjoying our purchase as soon as possible, worrying about paying for it some other time.
Consumer behaviour like this is very popular and isn't going to change any time soon, so the use of credit cards is likely to remain popular hence in Ireland almost two million of us have credit cards. This is all well and good once the credit card balance is cleared each month. If you clear the balance due each month you end up paying no credit card interest and not building up debt.
If everyone did this, the credit card companies wouldn't make any money - but the reality is a lot of people don't pay the full balance each month and credit card companies make a serious amount of money.
“Having a smaller credit limit will stop you from overspending and will help slow down the rate at which you're building up debt"
MINIMUM AMOUNT DUE
Temptation stares consumers in the face every time they get their monthly bill - the nice small figure showing the 'Minimum amount clue'. This is typically about five percent of the total amount due and its very existence tricks a lot of people into just paying the minimum amount due at the end of the month. You then get charged a very high interest rate on the balance, and the next month if you continue to use your credit card, and continue to only pay the minimum amount due your debt grows and the interest grows proportionally and this has the potential, for many people, to become a bill that they can never get on top of. That 'bargain' €150 jacket, which was down from€250, could end up costing you €300 – not such a bargain now.
The other main issue for consumers, which is built into the process by the credit card companies, is the credit limit - and the automatic increases of your credit limit.
You'll notice your credit limit going up automatically over time and this further tempts people to spend up the limit so a few years ago you may not have been able to spend more than €1,000 using your credit card, but now you can buy a €4,500 car with it. It's human nature that some people will spend up to their credit limit, and it further increases your chances of getting into serious debt and making more money for the credit card companies.
GETTING OUT OF DEBT
There are several techniques you can use to clear existing credit card debt and to eliminate future credit card debt.
Setup a monthly direct debit to clear the full balance of your credit card each month. If you ask your bank to do this they will do it.
This 100 per cent eliminates the possibility to build up debt and you'll never have to pay any interest. If you currently have a small credit card balance that you can clear at the end of the month then this is the option to go for. This will also help you manage your spending as your bank balance at the end of each month is a more accurate reflection of how much money you have to spend. If this is not feasible for you, then consider paying as much as you can each month, certainly aim to pay a lot more than just the minimum amount due.
TAKE A HOLIDAYFROM PAYING INTEREST
If you have a credit card balance that you are struggling to get on top of then not paying interest for a few months will be a welcome relief and it will leave you with more money to clear the balance. The way to get an interest free period is to switch to a credit card provider offering an introductory interest free period on balances transferred to them.
Some introductory offers include an interest free period (eg six months) on purchases also as well as on the balance.
Search online for 'zero percent interest credit cards or visit www.bonkers.ie to compare the introductory offers that are currently available. Once your introductory interest free period is up, make sure you check that the interest rate you are on is acceptable, if it isn't then switch to another provider with a lower interest rate.
If your credit card limit has crept up over the years then get in touch with your credit card provider and ask them to reduce your credit limit back down to €1,000 or €1,500 - or whatever figure you feel is small enough but still practical for you. While you are speaking to them, ask them to stop increasing your credit limit - which they will do just by you asking. Having a smaller credit limit will stop you from overspending and will help slow down the rate at which you are building up debt.
"The credit card system is designed to get you to spend as much money as possible with high credit limits"
With credit card interest rates as high as 34.6 per cent APR (yes, that's thirty four point six per cent) on some credit cards it can be very difficult to get on top of your credit card bill. One clever way to get clear the debt, or reduce it at least, is to get a personal loan to clear the balance. So you end up borrowing money at six per cent for example to pay off a bill with an interest rate of 34.6 per cent. Not everyone will qualify for loan approval but it's worth looking into.
Try to get into the habit of paying as you go, by using cash or a debit card. Even when buying online a debit card can now be used for more or less all online transactions.
Paying as you go is easier said than done, but it can become a habit and could save you €l,OOOs over the years. If you haven't got the money to buy something then you cannot afford to buy it. You might get to the stage where you could consider cancelling your credit card - this will save you an additional€30 per year on government stamp duty forcredit cards. Note: the annual government stamp duty on debit cards is only €10.
Consider getting a pre-paid card instead of a credit card, you need to transfer money into it and you then use it like a credit card, except you can't spend more than the amount you transferred into it, you cannot get into debt with it. It's accepted wherever credit cards are accepted. As you can see above, the credit card system is designed to get you to spend as much money as possible with high credit limits and it's designed to get you into debt (and keep you in debt) with low minimum amounts due and high interest rates. But there are ways to tackle this as outlined above, and like any self-improvement the time to start is now.
Written by James O’Donovan