Jill Kerby

CREDIT CARD CONTROL THE START OF 2013 AS YEAR OF DEBT SETTLEMENT

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. 

IRISH AND ITALIANS NOW SHARE PROPERTY TAX PAIN

We are not the only country coming to terms with a new property tax.

In Rome, the Christmas spirit – and the shopping – has been dampened by the fact that Italians have had to pay the second installment of their reinstated property tax on primary residences, the IMU, this past week.

The first installment of the 0.4% tax on market values had to be paid last July. With the existing taxes on second and subsequent properties, the EMU is expected to raise €20 billion for the Italian exchequer.

Residential property tax (on first homes) was only abolished by the Berlusconi government four years ago, which might explain how, while this tax is unpopular it might not cause the same level of resentment in Ireland where it is over 30 years since our family homes were taxed.

At 0.4% of the market value of the property (and property values are being hiked a massive 60% by some local Italian taxing authorities) it is a considerably larger sum to pay for many Italians, especially Romans, where a tiny apartment of 30-35 square metres in the city centre will typically cost €450,000-€500,000.  The IMU exemption amount is just the first €200 with another €50 per child up to age 26 to a maximum exemption of €400.

Meanwhile, the second resident tax of 0.67% of the market value still applies, but like with our new property tax in which the local authority can also adjust it upward by 15%, in Italy the second property tax can be adjusted upward by 20% to a maximum of 1.06% of the market value.

In Rome, where property prices are so high and a good sized centre city apartment is easily worth €1 million (and may have been in the family for centuries!)  the 0.4% tax is going to cost such an owner €4,000 a year. Meanwhile, everyone complains about worsening local authority services and higher transport costs (Rome’s notoriously low bus/metro fares are up 50% this year).

Most ordinary people rent their homes in Rome and they now expect rents to go up (if their leases permit such a rise) as building owners try to recoup their even higher commercial property tax.) Many more Italians become home owners during the 2000’s, taking advantage, like we did, of very low interest rates.

This 0.4% tax on a more typically priced €300,000 two or three bedroom apartment in a more distant suburb, will cost those Romans €1,000, on top of the higher income taxes and assorted levies that they are now paying.

Back in Ireland, our local property tax (LPT) must begin to be paid from July (but you must register and self-determine the amount of tax due in May). 

At 0.18% of the market value of your property, (rising to 0.25% on the value above €1 million) and owner with a €300,000 home will pay €540 compared to the €1000 (including the first €200 exemption) an Italian will pay.

The only full deferrals permitted here (at 4% flat interest per annum) are for single people earning less than €15,000 or couples earning less than €25,000. A 50% deferral is available for single people earning less than €25,000 or €35,000 for a couple. Mortgage payers can deduct 80% of their mortgage interest from their income which may assist them in qualifying for these deferrals.

The loss of child benefit payments and the LPT will be the two single tax increases from this budget that will hit families hardest in 2013. A family living in a house worth, say, €200,000 with three children will see their income fall by €456 a year in reduced child benefit payments and the €180 property tax  (€360 for a full year).

With higher car taxes, DIRT, excise on alcohol and tobacco these are most obvious places for a family to make up the €636 or €816 shortfall.  Switching any savings you have to tax free post office savings will save the one third of interest lost to DIRT.  Families are unlikely to be able to give up their car very easily, but this would amount to probably the most significant savings of all. Smokers and drinkers would easily spend – and save - €2,000 a year by giving up.

It may be a deeply unpopular suggestion, but where families are struggling, teenagers who earn money in part-time jobs should be asked to make a contribution to the household. A 20% family income tax is not an unreasonable amount to ask in their recessionary times and the amount collected from a teenaged boy or girl who babysits or stacks shop shelves and earns, say €150 a month, can add up to €360 a year towards the family property tax or, from next year, the new water charge.

Unless you have a spare room to rent (under the tax-free Rent-a-Room Scheme) or can find some other way to increase your income in 2013, the usual budget suggestions apply to families:  review your big ticket items – the mortgage, food, utilities and insurance. Can you pay interest-only on the mortgage?  Can you cut another 10% out of the food budget or waste less? Have you dropped down a health insurance plan (if you still have such insurance)?  How many mobile phones does the family really need?

PENSIONERS TARGETTED BY BUDGET 2013, SO PERSONAL BUDGET ADJUSTMENTS NEEDED

The main features of Budget 2013 have been well and truly gone over by most of the media but you might be a little surprised about a few of its hidden ‘attractions’, or by a few additions or subtractions to it that may yet appear next February/March when the Finance Bill is introduced to tie off the loose ends.

For the first time since these austerity budgets were introduced, older people, especially wealthy pensioners, have found themselves pretty squarely in the government’s crosshairs.

The main measures that affect this age group include the trebling of prescription charges; the raising of the income threshold for both the payment of USC by over 70s and for qualification of the over-70s medical car; the 10% hike in capital taxes like DIRT, CGT and CAT; the lowering of the home respite benefit and the adjustments to the household benefit package.

While all of these changes will undoubtedly cut the income or savings of older people, benefits that were left alone include the state pension rates and the bulk of the household benefits. One that was hit was the telephone allowance, but with an increasing number of older people opting to have mobile phones as well as their landline, it seems incongruous for the taxpayer to keep wholly subsidising this benefit.

Means testing is something that is likely to keep being introduced in future budgets due to anomalies like this one. Why, for example, do elderly people who can afford a run a private motorcar receive free state bus and rail passes?  (Why should wealthy parents be recipients of child benefit if its purpose is to assist low income or families in need?)

He means-testing quandary is likely to extend in the future to questions like, why should someone who can afford private health insurance – and one in five of all private health insurance members are over 60 and purchase the most expensive plans – also qualify for a free medical card (or GP only card now) with annual income up to €30,000 for an individual or €60,000 for a couple? (These are the new income thresholds, down from €36,000 and €72,000).

Pensioners on fixed incomes are particularly vulnerable to cost of living inflation and the politicians are aware of this. Inflation is just another hidden tax, but it permits politicians to get away (up to a point) in being able to avoid actually cutting pension payments. Freezing them for three years allows inflation to do the cutting.

The only way low income pensioners can offset the real cost of the freezing of your pension, the cuts to the household package or higher prescription charges is to try and find savings in your own spending or seek higher returns from any savings or other assets you may have.

Here are a few practical solutions to do just that:

-       Shop around for better utility charges. Check out www.bonkers.ie for best fuel, electricity and telecoms costs. You fill out your existing bill details and they come up with alternative, cheaper providers.

-       You can also compare your deposit rates on www.bonkers.ie or the National Consumer Agency website, www.nca.ie . If you earn less than €18k (€36k for a couple) you are exempt from DIRT at source.

-       Review your health insurance and if possible switch to a similar, cheaper ‘corporate’ product or new provider before next March when higher risk equalisation payments are expected to be imposed by the government. Check out www.healthinsurancesavings.ie.

-       The government has not amended or withdrawn the Rent-a-Room-Scheme which allows anyone with a spare room(s) to rent to earn up to €10,000, tax-free. If you live alone, the rental income will have no impact on any means-tested social welfare benefits you receive.

-       Consider selling/auctioning household goods, antiques, jewellery and other items that you don’t use or need. There may be a real treasure lurking in that sideboard or attic. Local auction salesrooms, collectible and antique shows, car-boot sales, eBay and other on-line sites are all good ways to earn a little money by selling things you no longer want or need.

-       Pensioners on the income margins for the purposes of paying the new property tax next year (€15k gross for a single person and €25k for a couple) should speak to a tax advisor about how to adjust their income so that it may qualify for the property tax deferral. (Spending some capital on insulating your home may result in loss of deposit earnings, but may be well spent if it saves fuel costs and improves your health.)

Finally, one change that has received practically no coverage is the increase in the terms for the Fair Deal nursing home scheme.

Up to now, the person availing of the scheme and taking up a nursing home place was required to contribute 80% of their annual pension income plus 5% of the value of other assets (usually the family home) for a maximum of three years. Upon the person’s death, their estate would pay over this cumulative 15% asset value.

Budget 2013 has increased this amount to 22% and sets the precedent to increase it further for the next two austerity budgets in 2014 and 2015.

Next week…Be prepared: Budget 2013 coping strategies for families.

A HAPPY, AFFORDABLE CHRISTMAS STARTS WITH A BUDGET AND A PLAN

There will be plenty of time to dissect today’s Budget next week. So let us consider an even more pressing budget – and for a much happier cause: our annual Christmas celebration.

Whatever your financial circumstances, Christmas in Ireland is still a mainly social occasion that is shared with family, friends and community and it can still be a pleasurable holiday, even with a limited budget.

For those families that have set aside some income or savings for the holiday presents, food and entertainment, the expectation is for an average spend of just under €1,000, with Ireland second only to Luxembourg in the spending stakes.  Of the approximately €1 billion national Christmas outlay here, as much as €420 million will be spent on-line this year according to Visa Ireland.

Our on-line shopping is up sharply (from c€257 million last year) for a number of reasons:  on-line activity is growing anyway; it is convenient and a good way to stick to lists and budgets; delivery costs are falling (and are free in many cases) and consumer rights and security keeps improving.

For all of that, Christmas gifts bought by Irish people over the internet don’t always go to Irish retailers and many people are not aware of the Irish shops that sell and deliver their goods on-line. This is an issue that Irish retailers need to address if they are to compete with the global players like Amazon and eBay.

YOU NEED A PLAN

Since every cent has to count this year, try to avoid the most common Christmas shopping mistakes by having a proper plan. My top money and high street shopping tips for this December include:

• Set a spending limit.
• Make a list of all the children/adults/teachers/tradesmen/charities that you want to gift.
• Big families should do a Kris Kringle with a reasonable spending limit
• If your budget is very tight, consider limiting purchased gifts to young children only.
• Choose one form of money only – cash or credit card or debit card, not all three. Ideally, only spend what is in your Christmas spending account (which you can open separately and at no cost at your bank or local Post Office, for example.)
• Prepare your high street shopping campaign: go early to avoid the crowds; park or shop as close to car parks or public transportation. Wear light, comfortable clothing. Don’t bring partners or children unless they are willing load bearers.  Stop every two hours for a food break.
• Consider a gift ‘theme’. It means you don’t wander aimlessly from shop to shop looking for inspiration. (See below)
• Ask if your local store will deliver. Many florists, butchers, vegetable shops, deli’s, will try and accommodate their local customers (they are competing with Tesco/Superquinn who do.)
• Check out if your local department store, bookshop, electronics shop has an on-line service.
• ‘Buy Irish’ at local and national craft fairs.
• Give yourself plenty of time to shop or order via the internet. Don’t rush or you’ll spend more than you intend. Be aware of delivery order deadlines.

Not everyone can afford to buy as many Christmas presents as they would like, especially if they have little ones to consider.

This is where the true spirit of Christmas is tested and where the old adage, “it is the thought that counts” comes into its own.

‘Theme’ gifts, recycling and home-made Christmas presents are the ideal way to spread holiday cheer far wider than your cash budget may permit, and I have yet to meet anyone (with an open heart…) who doesn’t appreciate the thought, effort and time that often goes into such presents.

Here are some of my tried and tested, low cost and/or recycled and home-made gift suggestions:

• Food gifts. Either make your own home made jam, bread, mince pies, cakes, sweet biscuits or sweets, sauces or buy them homemade at Christmas fairs and bake sales (freeze until ready.) Wrap them in clear plastic with pretty labels and ribbons.

• Small boxes of luxury Irish chocolates/sweets are a modestly priced but wonderful gift: Aine Handmade Chocolates, Lir and Lily O’Brien all offer on-line shopping; my all time favourite, Cocoa Atelier do not, but should. Lily O’Brien has a Christmas box for sale that allows you to slip a photo into the cover to personalise your gift.

• Candles and soaps, small picture frames, books, dvd’s and cds, are all popular ‘themed’ gifts if you personalise them and choose them based on your recipients tastes and interests, not yours.

• Consider living gifts – house or garden plants, flowers and seeds/seedlings are a wonderful gift for everyone and you can buy new or recycle from your own garden.

• Recycle. Many people and families are cash poor this year, but the last few decades have all been about accumulating a lot of ‘stuff’.  Consider giving away books (hardbacks are usually in better condition than paperbacks), stacks of dvds (chickflicks for teenaged girls and their mums; comedies for young family; action movies for young fellows and dads; histories/documentaries for the serious minded). Share your music the same way.

•  Give ‘Time’ gifts (this is a great, low cost Kris Kringle idea.) A beautiful card that includes a precious gift of your time is always welcome:  young families would love to receive babysitting time; older people, an outing or regular visits. Offer to give your gift recipient a baking, cooking, photography or sports lesson or a few hours of help in planting bulbs or weeding, interior decoration or a monthly manicure (or massage) if you know how.

Finally, a charitable gift in your family’s name is much appreciated by local and overseas charities and is a way to teach your children about the real message of Christmas.  Send a cheque or give on-line.