Credit card interest can be more than double what you borrowed and turn relatively manageable debt into something that takes over six years to pay off.
Yet most of us don’t know how much interest we pay on our credit cards – and the pandemic has made almost six in ten of us more dependent on them, according to the Irish League of Credit Unions.
Additionally, the rising cost of living could cause more people to rely on credit cards and run into debt problems.
“We are seeing pressure on people to meet their normal daily living expenses due to price increases,” said Michael Laffey, regional director of the North Leinster Money Advice and Budgeting Service (MABS). “People may have put payment plans [plans to repay money owed on electricity bills, rent and so on] in place six months ago – depending on their budget at the time. Now that the cost of living has increased, they may not be able to meet this payment plan. This has an impact on the credit card in some cases.
“Credit card debt normally disappears as a result of a problem with another problem. The individual can for example enter MABS [for advice] because they are in arrears on electricity or rent bills – and that’s when their credit card debt is discovered.
Here are ten ways to keep credit card bills from spiraling out of control.
1 Pay your bill in full each month
You can avoid interest on your credit card bill by paying it off in full each month and on the date it’s due – as long as you have only used your card for purchases and have not withdrawn cash with it.
2 Do not add children to your map
Most providers allow you to add one or more additional cardholders to your card (such as your spouse, partner, child, parent, sibling) as long as they live at the same address as you. Some providers allow you to add someone as young as 16 to your card; with others the age limit is 18.
Be very careful when adding other cardholders to your credit card, especially if it’s a child. Additional cardholders will be able to access credit through your card (usually up to your credit limit). A teenager or young student may not have the financial maturity or knowledge to be able to handle a credit card. In the wrong hands, it would be very easy for your credit card bill to spiral out of control. You will be responsible for any debt that your child – or any other member of your family that you add to your map – clocks on your map.
3 Do not withdraw money
Most credit card providers don’t offer an interest-free period for cash withdrawals, which means you’re usually charged from the day you withdraw the money. So even if you pay your bill in full, you often won’t be able to avoid the interest.
4 Avoid minimum payments
“A die [main] credit card debt can be a problem is people are paying the minimum monthly payment on their bill,” Laffey said.
When you sign up for a credit card, you usually have the option of paying a minimum amount on your credit card each time your bill is due. This is usually around 1-5pc of the total amount you owe. With AIB’s Click card for example, the minimum monthly payment is 3% of the outstanding amount or €6.35 (whichever is greater). With Avant Money’s One Card, the minimum payout is 1pc or €25 (whichever is greater).
It would take six years and five months to pay off a €1,000 credit card bill if you choose to pay just €25 a month and the interest rate on the card is 22.9%, according to the Commission competition and consumer protection.
The longer it takes to pay off a credit card bill, the higher the interest you will face. So pay as much as you can on your credit card each month to reduce your debt as quickly as possible.
5 Play by your card rules
If you don’t follow your credit card rules, penalty charges will be added to your bill and these charges can be very high. You could be hit with fees of up to €15.24 if you are late paying the minimum monthly payment on your credit card bill, for example, while over-the-limit charges on your credit card can be up to 12, €70.
Also watch out for the unpaid item fee, which can be as high as €19.05 and is charged when you don’t have enough money in your account to pay for a credit card transaction.
6 Reduce your credit limit
The credit limit on your card could easily run into the thousands. This limit can also be automatically increased gradually – if you pay your bills on time. Don’t get into the habit of regularly running out of your full credit limit, even if you manage to avoid interest by paying your bill in full each month. Circumstances can change and if this happened to you when you ran up a big credit card bill, it could take years to pay off the debt and the interest will probably increase as well.
“Middle-income people who have reasonably high credit limits due to a previously high salary often run into problems with credit card debt, because that high limit usually stays in place, even if their salary drops,” said said Laffey. “During the pandemic, people may have used their credit card credit limit as a safety net because it was easier to borrow money on a credit card than to apply for a loan.”
To prevent a high credit limit from getting you in trouble, ask your provider to lower your credit card limit.
7 Switch to a cheaper credit card
You could avoid interest on your credit card bill if you switch to a card that charges no interest on credit card balance transfers for a period of time – as long as you pay off your bill in full within that interest-free window. A number of credit cards charge no interest on balance transfers between six and twelve months. The cards with the best interest-free windows on balance transfers are An Post’s Classic Credit Card (interest-free for the first year) and Avant Money’s One Card (interest-free for the first nine months).
Be sure to cancel your old card if you switch cards and find out what interest rate will apply to the new card once the interest-free period is over – as the interest could be much higher than on your old one map at this point.
8 Get a cheaper loan
Another option if you have significant credit card debt is to take out a low-interest personal loan from a credit union or bank and use that loan to pay your credit card bill. . You will still have to repay the loan, but since it will be cheaper than your credit card, it should be easier to clear the debt.
9 Not having multiple cards
It’s easy to lose track of your debts and spiral out of control if you have multiple cards. You could rack up tens of thousands of dollars in debt with multiple cards. Only use one.
10 Ask for help
“If you’re having trouble with your credit card bill, contact your credit card company and find a payment plan,” Laffey said. “The credit card company should set up a payment plan for you and, in some cases, lower the interest rate.” Call the MABS Helpline 0818072000 if you need help.
Which credit cards are the most expensive?
There are a number of credit cards – including AIB’s ‘be’ card, An Post’s Classic card and Avant Money’s One card – which charge 22.9% interest on purchases by credit card (the interest that accrues if you use your card to buy things, rather than withdraw cash). As 22.9pc is one of the highest interest rates charged on credit card purchases, these are among the most expensive credit cards available. (AIB’s ‘b’ interest rate is lower if you spend €5,000 or more on the card).
TSB’s permanent Ice card, which charges 22.53% interest on credit card purchases, is also one of the most expensive cards. Bank of Ireland’s Aer credit card, which offers travel rewards, has the highest interest rate for credit card purchases, at 26.6%. It also has a monthly fee of €7.99.
Penalties are another thing to watch out for, especially if you’re prone to paying your bill late or going over your credit limit. Some of the most expensive cards for penalty fees are the Avant Money’s One card and the An Post’s Classic card – both have a late payment fee of €15.24 and an overlimit fee of €12.70 .
How much interest can be charged on a €1,000 credit card bill?
The interest on a €1,000 credit card bill can reach up to €2,109 over five years (more than double the amount originally borrowed) if the interest rate on the card is 22.9 pc and that you haven’t repaid one of the bills in five years, according to Ronan Coburn, a forensic accountant at Dublin banking consultancy The Bottom Line.
Interest on a $1,000 credit card bill would be $255 (about a quarter of the amount borrowed) after the first year if 22.9% interest is charged and no $1,000 bill € is paid during this period. year, according to Coburn.
Keep in mind that you usually have to make a minimum payment on your credit card bill each month and you will usually be penalized if you don’t.
How much interest can be charged on a €200 credit card bill?
Interest on a small credit card bill of €200 would amount to €461 after five years – if none of that €200 was paid during that time and an interest rate of 22.9pc was billed, according to Coburn. The interest on the €200 bill would reach €56 after the first year if no bill was paid off in that year (assuming 22.9% interest was charged), Coburn added.
How much could I save by choosing a cheaper credit card?
The interest you incur on a credit card bill could be cut in half if you choose a cheaper card. For example, with a rate of 13.8pc, AIB’s Click Card charges the lowest interest on credit card purchases. Interest on a €1,000 credit card bill would amount to €986 after five years on Click – assuming no €1,000 bill was paid in those five years, according to Coburn. While this is still a high amount of interest, it is less than half the interest someone would face with a card that charges 22.9% interest.