Credit Cards - MABS Investigates
3rd February 2021
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In MABS we receive a lot of great questions about money matters and tackling debt. Questions that we know many people want to ask, but don't know who to ask or where to start. ‘MABS Investigates’ is here to help. In this series of blogs, we will answer these questions and “investigate” these topics, to bring clarity and break down the jargon.
The focus of this week’s ‘MABS Investigates’ is Credit Cards. We receive many questions regarding Credit Cards, some of the most popular include:
- What is a credit card?
- What is the difference between a debit card and a credit card?
- What is APR & what does interest mean?
- What is a minimum payment?
- What happens if I miss a payment or I’m late paying?
- What transferring a balance means and if it is right for you.
A credit card is a plastic card used in place of a debit card or cash to make purchases. When you apply for a credit card, the credit card provider will set the limit of credit you can borrow. When you make purchases on a credit card, the payment does not come out of your bank, instead you will get a bill for the purchases each month.
If you decide to use a credit card it is advised that you pay the full outstanding balance on the bill by the payment date. Otherwise, you will be charged interest on the balance. There will be a minimum payment listed on your bill, which we will cover later in the blog.
There are also pre-paid credit cards which can be used in the same way as a credit or debit card. These can be topped-up with money and can be useful in situations where cash isn’t an option but you want the security of knowing it’s already paid for. Pre-paid credit cards can be expensive for withdrawing cash from an ATM and some have monthly maintenance fees.
Debit cards are linked directly to your current bank account. This means that when you make a purchase, it comes out of your bank account almost in real time. With a credit card, the amount of credit available reduces and you pay the outstanding balance (the amount you’ve spent) back at a later date - usually when the bill comes in.
APR stands for Annual Percentage Rate or sometimes seen as APRC which means Annual Percentage Rate Charged. APR is the interest rate charged on the credit card balance if the balance is not paid in full before the payment date. Interest is the cost of the credit charged by the credit card provider. Interest rates can vary from 13.8%* to 22.9%* in Ireland.
Some credit card providers will offer a 0% rate, however, this is normally for a limited period, for example 6 months and is used an incentive to switch from one provider to another. It is important to read the terms and conditions to know how much you will be charged once the 0% rate period is over.
If you pay your bill in full before the payment date this is known as the “interest free period” and is generally about fixty-six days. Be aware of your terms and conditions though as this does not apply to cash withdrawals in most cases and you could be charged interest on these immediately.
Withdrawing cash on your credit card is very expensive. You can be charged a transaction fee for taking out the cash in the first place, on top of the interest charged for the cash you’ve taken out. The rate of interest charged and transaction fees vary greatly between providers but always check your terms and conditions so if you do find yourself in an emergency situation and need to withdraw cash from your credit card you know how much it is going to cost you.
A minimum payment is the amount the credit card provider lists on your monthly bill as the minimum required payment. This varies between 2%-5% of the balance due. It is advised that you pay off the balance in full so you will not be charged interest. However, if you cannot make a full payment, you must pay at least the minimum payment.
Here’s how long it could potentially take to pay off your credit card by only paying the minimum payment each month. Let’s say you have a balance of €1000 on your credit card, and you do no more spending on the card until you clear the balance. How long do you think it would take to clear it? The answer may shock you.
It would take 7 years and 11 months just to clear the balance with interest. Really makes you think doesn’t it? We used the CCPC Clearing your Credit Card Calculator (opens in new window) to illustrate this example.
If you don’t make the minimum payment by the due date listed on your credit card bill, you can be charged full interest on the balance, and often you can be charged late fees on top of the interest. This late payment will also be reflected on your credit report.
If you are having difficulty making repayments to your credit card balance, you should speak with your credit card provider about your situation. If you don’t feel you can talk to your credit card provider, contact MABS, we can help. You can contact us on live chat, by calling the Helpline or by contacting your local office.
Transferring a balance is like switching your electricity or gas supplier, you will move the money you owe to a different credit card provider. This might be done to move to a lower interest rate to make repayments more affordable.
Some credit card providers offer a 0% interest period (6-12 months) and 0% on transferring a balance, meaning you get a bit of breathing room on the interest to pay down the balance. You can also talk to your current credit card provider about a lower interest rate or a 0% interest period, but this will be taken on a case-by-case basis.
*Note on Credit Cards over 23% APR
Any company offering a credit card with an interest rate over 23% is considered a moneylender. Under the Central Bank of Ireland rules lending charged above 23% APR is considered a high-cost form of credit. Different Central Bank of Ireland rules apply to moneylenders. You can learn more on the Central Bank website page about Moneylenders here (opens in new window).
Have you got a money or debt advice question that you'd like answered? Get in touch, and we'll give you a clear and accurate answer to your money and debt advice questions.
At MABS we advise to not use credit cards if possible as they are a high-cost form of credit, but we are aware that many people have them but don’t really understand how they work. If you do have a credit card with an outstanding balance, then we would advise that you try to pay it off as soon as possible. If you don’t where to start and would like to speak with a money adviser call 0761 07 2000 or chat with a an adviser online.
Disclaimer: This blog does not represent legal advice and is intended for guidance only. If you are concerned about your current or future personal financial situation then please contact an adviser from MABS. All face-to-face consultations are currently suspended, however advisers are available by phone and email and through our online chat. You can call the MABS National Helpline on 0761 07 2000, Monday to Friday, from 9am to 8pm or find the contact details for your local office here.