On the debit side... credit card interest rates rising

One in three people uses them for monthly bills, but if you don't pay the debt on time, you will pay a large penalty, says John Hearne

AS competition disappears from the credit card market, banks and credit card companies are hitting cash-strapped consumers with higher charges and more restrictive conditions.

Bank of Ireland just announced that from next month, it will scrap the free-borrowing period it used to offer its credit card customers.

If you withdraw cash from an ATM with your credit card, you'll pay interest from the moment you get the money. Previously, Bank of Ireland customers didn't pay interest if they paid their bill on time.

On top of that, the bank will impose an astonishing 26% annualised interest rate on cash withdrawals, easily the highest rate in the market. The news comes as research reveals just how much Irish consumers are relying on their credit cards to bridge the gap between incomings and outgoings each month.

A survey from the Irish League of Credit Unions has found that one in three adults use their credit card to pay monthly bills. In all, consumers are racking up credit card spending of almost €500 each month.

And not all of us are managing to pay off that debt on time.

The survey suggests that three out of ten adults fall behind on credit card bills, while the average owed is €2,500. Credit cards are the Jekyll & Hyde of consumer credit. If you pay off your bill on time each month, they're easily the cheapest form of credit card out there.

And given the fact that the banks have also been loading charges onto every other form of transaction, credit cards are now cheaper to use than most debit cards.

But if you don't manage to pay in full and on time, you'll be hit with some of the highest interest rates in banking.

Currently, the APR charged on purchases on Irish credit cards ranges from 13.6% to 22.7%, while cash withdrawals will set you back between 16.7%and 21.36%.

"Competition has evaporated," says Simon Moynihan of price comparison website, Bonkers.ie. He points out that with the exit of Danske bank from retail banking, the three credit cards that it had offered are now gone.

And they are only the latest provider to go. "Capital One is gone, MBNA is gone, Halifax is gone, RBS is gone. There are now only five credit card providers left. We've got Tesco, Bank of Ireland, AIB, Ulster Bank and Permanent TSB. That's it. And as competition disappears, those that remain have tightened up their credit criteria. The days when you would regularly get invitations from credit card companies offering free cash to sign up are long gone.

When it comes to credit cards, the only piece of advice is this: Pay it off in full and on time. If you get yourself into a situation where you're carrying a growing balance each month, the costs are going to pile up very quickly.

The National Consumer agency's website, conumerhelp.ie offers a very handy credit card, ready reckoner which will tell you exactly how long it's going to take to clear a debt depending on what you pay each month.

If, for example, you have credit card debt of €2,500 and the APR is 20%, it will take no less than nine years to pay it off in full if you pay €50 a month, and don't rack up any more debt over that nine years.

On the debit side ... credit card interest rates rising.  But if you double the payment to €100 per month, the balance will be cleared in 2 years and nine months.

Another option is to switch your card to one of the two credit card providers that offer 0% finance on balance transfers - Tesco Personal Finance and Permanent TSB. Proceed with caution here.

If you're accepted — and it's no guarantee that you will be accepted — switching will buy you six months.

Once you switch, you'll have to make sure to close your old account, and when you do, you'll have to stump up the €30 stamp duty that the government takes annually from every credit card account. To ensure that you're not charged the same duty on your new card, you'll need a letter of closure from your old provider which you then forward to the new company.

Another alternative is to take out a credit union loan to pay off the outstanding debt. Interest rates on credit union loans can be as low as 6%, making this one a no-brainer if you can't get a zero percent switching deal from another credit card provider.

Funnily enough, there are plenty of people out there who are saving and carrying large credit card balances at the same time.

Deposit rates are pretty miserable at the moment; the best in the market is only around 2.4%, and after 41% DIRT is taken off, that will only leave you with around 1.4%.

If you've got €5,000 in the bank and at the same time you're carrying a credit card debt of €1,500 per month, even if it's at the lowest credit card rate that's out there at the moment, which is AIB's 13.6%, you will still save yourself a packet by simply paying off the credit card.

If neither of these solutions work for you and the debt has become simply unmanageable, talk to the Money Advice and Budgeting Service (MABS) and read up on your options at Consumerhelp.ie.

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