Consumer Corner: Are credit cards your flexible friend or foe?

Credit Cards Shot of a beautiful young woman using her cellphone and credit card while relaxing on a couch at home

Credit cards get a lot of bad press. It's all about how you use them however and using them wisely and sensibly is key. A credit card is basically the bank giving you a loan to purchase something and giving you a number of days to pay back. It is when you don’t pay back that things get messy. 

A sensible approach to credit cards means that they can be a very handy tool for paying for items but you have to think ahead. My mother often jokes with us that we couldn’t understand why she couldn’t buy a trip to Disneyland for us when we were younger with her credit card. In fact she could but then how would she pay the bank back. This is where thing can turn sour.

John Lowe of MoneyDoctors.ie likes to quote Christopher Parker on credit cards - “Procrastination is like a credit card – it’s a lot of fun until you get the bill”.

At Christmas alone we spend more than €2.2 billion on our credit cards. The buzzword for credit cards was that they were your ‘flexible friend’ but that friend could turn nasty if you ignore them.

Interest rates on credit cards can range from 13% to 26%. This means that if you do not pay off what you spent you will be charged interest on that spend. If you pay your bill in full before the due date you will not be charged any interest. This is called the ‘interest-free period’. This varies but is generally about 56 days. However watch it when it comes to cash withdrawals as most credit card providers don’t offer an interest-free period for cash withdrawals. You also have to be careful with only paying off part of your credit card bill as you could be charged interest on your full bill.

Kevin Johnson, CEO of Credit Union Development Association (CUDA) said that using a credit card can make purchases up to a fifth more expensive.

“So that nice jacket that’s priced at €49.95 seems like a good deal, but if you knew the real cost was €60, would you still want to buy it,” he asks.

“Credit cards can be an extremely expensive form of credit, the use of which has been to the financial detriment of many people,” he said.

Mr Johnson said he has seen some breath-taking credit card balances - in some cases the balance would have taken many years to clear at the current “minimum payment”.

He points out that credit cards are useful for those who have the financial discipline to operate them correctly.

“Many people know this, but some don’t – it is imperative that you keep on top of your minimum payment due on your card on a monthly basis. If you miss a payment then a flag will be raised on your account – and if you miss several payments, even if they’re not in sequence, then this could have a negative effect on your credit score,” he said.

Mr Lowe said that only half of us only pay the minimum monthly requirement and at some of the rates the credit card companies charge, it would take 20 years to pay off the credit card debt if only making those minimum payments.

Credit cards are also subject to government stamp duty of €30 every year so you will pay for the card this way. Some credit card providers may also charge an annual fee.