MoneyTimes - Dec 25, 2012

Posted by Jill Kerby on December 26 2012 @ 09:00



Bank of Ireland’s pre-Christmas announcement that it was raising the interest rate on its ‘classic’ credit card by a whopping 4% to 19.9% is positively Scrooge-like, but customers shouldn’t expect any change of heart between now and when your next balance statement arrives in January.

Lending interest rates are on the rise in Ireland and deposit rates are coming down and will be taxed more heavily for one very good reason – the banks and the state need more money.

Irish lenders, especially the state-owned ones, are still anxious about their deeply vulnerable balance sheets and the tsunami of impaired debt that will start hitting them in the New Year when the new insolvency/bankruptcy system gets underway, but also when the still growing, teetering edifice of mortgage debt begins to collapse.

We should all expect the cost of lending to keep going up so it makes sense to try and work out a strategy that gets you out of this negative bank charges spiral as soon as possible.

With interest rates varying from 13.6% to 22.7% (AIB having the distinction of offering the cheapest and most expensive cards), borrowing short term money via a credit card remains the most expensive form of bank credit, beaten only by certain hire purchase loans and those from licensed moneylenders. (Illegal loan sharks don’t rank with legitimate forms of credit providers and should be avoided at all costs.)

The ideal way to use a credit card is by automatically paying off the balance at the end of every month with a direct debit facility. That way, you only use your card for those purchases you know you can afford and it is primarily a spending vehicle of convenience and safety.

Debit style Visa cards are even better option since they you only use the funds in your account but provide the credit like ‘facility’ that is demanded by on-line car hire companies, hotels and airlines, ticket sellers, etc.

Unfortunately, paying off the balance every month, and avoiding paying any interest, is not how Visa and Mastercard make their enormous profits. The high interest rates their affiliated banks charge is how they can afford to extend and roll-over relatively large, unsecured sums of money.  The credit card banks know

that the credit card is the only source of credit for so many people now who don’t qualify for cheaper personal loans or overdrafts because their income is down, their credit record may be slightly impaired or their job is not secure.  These customers may have little or no choice but to accept higher and higher interest rates.

If this is your position you should at least consider a couple of options.  Can you switch to a card provider (like PTSB, Tesco) ideally with a six or 12 month zero interest period in order to bring down your balance quicker?

Can you borrow a personal loan to clear your expensive credit card balance, and then switch to a cheaper card provider?

If your bank turns you down, can you convince your local credit union to help you clear the expensive credit card balance?  Credit union interest is paid only on the reducing balance of your debt and does not compound.

Debt servicing deals, write-downs and write-offs are going to be the big money issues for 2013, so acting as soon as possible to control the most expensive debt you have – your credit card - is an essential step in regaining financial control.

However, do not fall into the trap of trying to clear unsecured debt at the expense of paying the rent or mortgage, keeping food on the table or heat and lights on in your home. 

It’s called unsecured debt for a good reason – the banks took a gamble lending you the money (and charged a whopping rate of interest in exchange.)  If you are already having trouble with the above, then you need to inform your lender/credit card company of this in writing and then seek a meeting to reschedule your repayments and/or an agreed write-down.

MABS is there to help people with credit card and other unmanageable debts. So is the credit union. You certainly want to sort out your expensive, but unsecured debt problems before the bank/credit card company takes legal action against you, but in cases where repayment is impossible and you have no income/no assets, there will be the option in 2013 of applying for a debt relief certificate, which if you qualify, will write off your unsecured debts up to €20,000.

The four insolvency options in the just-passed Personal Insolvency Act 2012 will provide varying degrees of debt relief and forgiveness to people in the most serious financial difficult who are simply in no position to repay their debts. But all these options will be expensive. (The bankruptcy option does not necessarily end with the three year discharge period as the banks can seek further repayments for another five years.)

 Nevertheless, for many, the loss of their credit record (or even all or part of their family home) will be a fair exchange if it ends the unbearable stress of living – for years - with huge debts that they can never repay.

We’ll look at who qualifies for the Personal Insolvency options in the New Year…and how to get to the top of the queue. 

1 comment(s)

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