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    Do You Really Understand How Your Credit Card Works?

    New research has revealed that although more than half of the population in Ireland owns a credit card, a whopping six in ten have no idea what interest rate they are paying. Even among those in the survey who said they do know what interest they were paying, the results proved differently.

    For example, a significant 20% who said they were aware of the interest rate thought they only paid between 6% and 10%. When in reality, credit card interest in the Irish market typically ranges from 13% to 23%.

    The study also revealed a worrying lack of knowledge around how credit card interest is applied. When the four in ten who said they knew what interest rate they were paying were asked about how the interest worked, there were a lot of incorrect assumptions. Just over a quarter correctly said they paid interest on the full balance from date of transaction to date of payment, as well as interest on the outstanding balance. 40% actually said they didn’t pay any interest!

    The reality with this lack of knowledge is that people will end up paying more than they anticipate when they use their credit card, as they are not factoring in the – often hefty – interest charged. This can throw their household budget out of whack and ensure they remain in a cycle of unnecessary debt.

    The best course of action is to clear the balance in full, bin the card and be done with it. However, credit cards have always been hugely popular so, for the majority this is unlikely to happen. Indeed, only 11% of credit card users in Ireland say they plan on binning the card in 2019. So at the very least, credit card users should get to grips with how their credit card works.**

    Top tips to manage your credit card.



    This one is a no-brainer. Clear your balance in full and on time every month. Note, this does not mean clearing your minimum repayment, which could be significantly lower than the balance. If you only pay the minimum repayment every month, you’ll pay a lot of interest and it could take years to clear the debt. Paying your balance in full is the best, and fail-safe way, to stay out of credit card debt.


    If you can’t achieve number one every month, then ensure you pay the minimum payment in full and on time. Aim to pay off more than the minimum repayment – the maximum amount you can afford to pay.


    Never miss a credit card payment. This can be a major red flag to potential future lenders if/when you need to borrow for a mortgage, car etc. The Central Credit Register in the Republic of Ireland is a centralised system which stores information on all loans of €500 or more, including credit cards and even overdrafts. Lenders are legally obliged to consult this register when making a decision on whether to lend amounts of €2,000 and over to you.  In Northern Ireland, companies like Experian and Equifax provide this service to lenders. So if you know you will not have money at the end of the month to pay for a purchase you’re planning to put on your card, then don’t use the card! It’s as simple as that.


    Stay below your credit card limit as much as you can at all times. Flying to close to your full credit limit on a frequent basis can be another red flag to lenders. A good rule of thumb is to keep your purchases to 30% of your credit limit, so for example, spending just €30/£30 a month on a card with a limit of €100/£100.


    In order to ensure you don’t miss payments and you are staying under your limit, track your spending every month. Sign up for an online credit card account if you have not already done so, and regularly log in to keep check on your spending. There are also apps you can use if you need more reminders! Getting and staying in this habit is crucial to healthy credit card use.
     

    Keep a close eye on your credit card statements. Whether you receive monthly paper bills or you deal with everything online, ensure you take some time to sit down and really check your statements. Mistakes and errors can and do happen, and you need to be on top of them to protect your credit. If you spot a mistake, contact your card issuer as soon as possible. They will need to investigate the error and ensure it’s rectified. It could also be a sign of fraud, so you really need to report these discrepancies straight away.

    Request your credit report. You can ask for a copy of your credit history any time, free of charge from the Central Credit Register. In Northern Ireland, Clearscore and Experian both provide free credit reports. Ensure you exercise this right so you are fully informed on what is on record about your credit history.


    Talk to your local credit union. Yes you heard us! The friendly staff in your local credit union are always willing to talk through any financial terms you may not understand, and to provide guidance on prudent monthly spending and budgeting. You can find contact details for your local credit union here. 

    If you find you are in need of financial assistance and you rely on credit, check out our blog on the unique benefits of a credit union loan, you may find it easier to take out an affordable loan where repayments are flexible and interest rates are significantly lower. 

     

    *All findings references are contained in a national study commissioned by the Irish League of Credit Unions, and carried out by independent research company, i-Reach Insights, in December 2018. 1,000 adults responded to this online survey.