It's the most expensive debt, so pay it off. By Charlie Weston
MANY of us financed the festive fun with our credit cards, but the bill for Christmas now needs to be paid. The best advice is to always pay off as much as you can afford. If you use your card for short-term credit and manage it well, a credit card can be extremely useful, but the problem is that debt can build up quickly if you do not pay your bill in full every month.
Paying off the minimum balance does not mean that you avoid interest. In fact, paying off anything less than 100pc of the balance outstanding at the end of each month means that you can be charged interest on the entire balance for the month.
And if you only make the minimum repayment every month, the amount you owe will reduce by very little because you are paying so much interest.
You would be wise not to miss any repayments and stop using your card again until the balance is paid off. It is worth remembering that by just making minimum payments it would take an incredible 20 years to clear your credit card bill.
WAYS IN WHICH TO CLEAR CREDIT CARD DEBT:
Use your savings to clear debts
It is amazing the number of people who have debts and savings at the same time.
Many people have been saving furiously since the economy hit the buffers five years ago. But with DIRT savings tax at 41pc, does it really make sense to save if you also owe money?
And it makes little sense to have €10,000 sitting in a bank account earning at most 2pc before tax if you are struggling with credit card debt where the interest rate is 21pc.
Get an immediate return of 21pc by paying off your card debt with your savings.
Sell your second car
If you are lucky enough to have a second car or buy-to-let property or holiday home, then it might be wise to sell these assets if you are heavily in debt. We are assuming here you do not need the second car for work.
Selling off any spare goods when you are in debt is a course of action recommended by some family finance experts. Granted, you will be selling at distressed prices but if you are really serious about eliminating your card debt you will dispose of everything you do not need for day-to-day living.
Get a credit union loan
It is well worth your while considering taking out a credit union loan to clear your plastic debt.
It does not make any sense to be paying 16pc interest on a credit card balance when you could have a personal loan for a fraction of that from your credit union.
A low-cost loan may also be available from your credit union. All credit unions will have different rates but some can be as low as 6pc.
Get a loan, write a cheque to your credit card provider and pay down the personal loan as fast as you can.
Get a loan from family or friends
This option is fraught with danger, the obvious pitfall being that any dispute about repayments could lead to a severing of relations. Also, the person being asked to help out may feel awkward about the situation.
However, if you can get over the embarrassment of asking for help, the big advantage is that loans from these sources are usually interest-free.
To ensure that neither the borrower nor the lender is compromised in any way, it might be a good idea to first agree the loan amount, the amount of interest, if any, and the repayment schedule, making particular reference to when the debt will be paid off.
It is then important to have it signed by both sides. If you are borrowing a large amount of money, it is only fair to agree to repay the amount and some interest.
There will be less chance of any resentment if some interest is paid.
Another way of showing your good faith is to offer some collateral. For example, you could hand over a valuable watch until the loan is repaid as a way of showing that this is a fair and formal deal.
It is also important to stick to the terms of the deal. If you, the borrower, have any difficulties meeting the repayments, approach you relative or friend and be upfront with them.
Otherwise, it will not just be a loan deal that goes sour.
Get a bank loan
If you are heavily indebted it is possible to have the interest and penalty charges frozen on your card.
Credit card companies don't admit this, but if you are heavily in arrears they will agree to freeze the interest and penalties.
Once you get the credit card company to stop applying the interest and penalty charges try and get a personal loan from your bank or credit union to pay off the card debt.
Rates average about 11pc from the banks, with credit unions loans being anywhere from 7pc to 12pc, depending on the individual branch.
It might also be a wise move to cut up the card.
Check out ConsumerHelp.ie for a list of interest rates charged by banks for loans in the cost comparison section.
Get a prepaid card
If you make online purchases then get a prepaid or disposable debit card. You do not need to have you credit history checked to get one of these.
You can get both Visa and Mastercard versions of prepaid debit cards. These can be used online and in retail outlets, just as you would a traditional debit or credit card.
The advantage with a prepaid debit card is that you can only spend the amount loaded onto the card.
With these products you avoid bank transaction charges, but there are often purchase fees and annual fees and other charges to watch out for.
A prepaid Visa card from O2 has no annual fee, but costs €9.99 to buy, according to price comparison site Bonkers.ie.
The Skrill prepaid Mastercard has an annual fee of €10, but no purchase cost.
With the Swirl prepaid Mastercard there is no annual fee and no purchase cost, according to Bonkers.
Neteller offers a prepaid Mastercard with no annual fee and no purchase cost either.
The Payzone Money Mastercard has no annual fee, but a €6 purchase price. With the Ryanair Mastercard Cash Passport, there is no annual fee, but a €10 purchase cost.