A recent survey suggested Irish people don’t understand how their credit cards work, certainly not as well as they ideally should.
According to the research study, commissioned by the Irish League of Credit Unions (ILCU), more than half the adult population (57%) has one but many cardholders are unclear of their interest rates and when interest begins to accumulate.
This is worrying; the first part of taking control of your finances is to fully understand them. There is nothing wrong with having a credit card and they are hugely useful in a variety of situations. But they are also one of the easiest ways to start accumulating lifestyle debt and finding yourself in a situation of paying interest on day-to-day expenses.
According to the survey almost six in ten (59%) credit card users said they were not aware of the interest rate they pay on their balance. Of those who said they did know the interest rate they pay, their answers did not always match with the actual rates on offer in the Irish market.
Among the same group — those saying they knew what interest rate they paid — there also appeared to be a lack of real knowledge of how interest was applied. For example, when they were asked to estimate how much interest they paid if they cleared their minimum monthly payment due, 40% incorrectly said they didn’t pay any interest.
Only 29% knew the correct answer, which is that generally cardholders pay interest on the full balance from date of transaction to date of payment, as well as interest on the outstanding balance while 12% had no idea how much interest they would pay after clearing the minimum due.
More than two thirds of respondents clear their balance in full every month. That is the financially sound thing to do, and those who don’t should reconsider their financial planning. In particular, the 18% who said they would clear the minimum payment due are at risk of paying significant interest if they do so on a regular basis.
If you are only meeting the minimum payments, and your balance is either staying the same or rising, you need to make a change. The ILCU, who commissioned this survey, would be happy to see consumers convert their credit card debt to a personal loan and get rid of the card.
“We are concerned about the lack of awareness around credit card interest, especially given the popularity of credit cards,” ILCU Head of Communications, Paul Bailey said. “Ideally, we would advise consumers to clear their balance in full, ditch the cards for good and make 2019 the year they free themselves from unnecessary debt.”
If you wish to still have a credit card for unexpected expenses you have a number of options. One is to clear your existing debt with a personal loan, such as from a credit union, and then reserve your card for emergencies. Another is to change credit card provider.
A number of Irish providers offer 0% or vastly reduced interest on balance transfers for a set period if you switch to them. For example, you can currently get 3.83% APR for 12 months with an AIB Platinum card and 0.00% APR for 6 months with a KBC Cash Reward card.
There are lots of plans being made at this time of year, from home decorations and renovation now we are over the winter to weddings, communions and other family celebrations coming up. While it seems easy to stick the cost on a card and worry about it later, that is the method likely to cause you difficulties in the long run. If you have time, try to save in order to be able to pay your costs as you go rather than afterward. If that is unmanageable, then a personal loan will come at a much lower interest rate, will be for a set amount and come with a clear repayment schedule. Sticking it on the card comes a distant third to these options and if it is the only option available to you, you would probably benefit from specialised financial support from an organisation like MABS.
Credit cards are useful but the less you use them, the more in control of your finances you will be.