Getting a credit card might seem like a dream come true, but it can quickly turn into a debt nightmare if you’re not careful.
"Interest is the fee the credit card company charges you for borrowing money."
A credit card is basically a type of loan. You must be 18 to apply for a credit card, and once a credit card company accepts you, you will be sent out a credit card, which you can then use for purchases and cash withdrawals. The credit card company will also set you a maximum spending limit. This spending limit depends on your income and on the credit card company’s policies on limits.
You can spend up to their maximum limit over a long period of time or all at once. However, once you have spent your limit, you will not be able to buy anything else on the card.
Note: Your credit card company cannot increase your limit without informing you.
The credit card provider will send you a statement each month. This statement will detail:
- The amount you spent since the last statement, and what you spent it on
- The total balance, which is the amount you owe
- The minimum payment you must pay- minimum payments vary, but they are usually between 2-5% of the total amount
- Any cash you withdraw with your credit card
- The interest that is due
The problem with credit cards
- Having a credit card can encourage people to spend money that they don’t have
- Many people do not fully understand how credit cards work - people may overspend or spend up the limit on their credit cards without realising that they are fully responsible for this debt, plus any interest charged
- Many people do not fully understand when interest rates are charged - their bills may end up being higher than they had planned for
All about interest
Interest is basically the fee the credit card company charges you for borrowing money. This is known as the annual percentage rate (APR).
- APR can be between 13 and 23%
- Different credit card companies charge different rates, so shop around for the best deal
You will be charged more over time if you only pay off the minimum amount each month. This is because you will be paying off a percentage of a higher amount over time, i.e. if you only pay 5% of a balance of €900, you will be paying a lot more than if you paid off 40% of that amount every month.
If you pay the bill in full before the due date, you will not be charged any interest. This is known as the ‘interest free period’. Most credit card companies do not have interest free periods for cash withdrawals however, so you will be charged for cash withdrawals.
If you pay off part of your bill, you will be charged interest on all purchases from the date of purchase onwards. So if you pay off €500 off a €1000 credit card debt, you will be charged interest on the remaining €500.
Danger signs to watch out for
- Not being able to pay your credit card fully off each month.
- Unless you are using a credit card for a very specific purpose (i.e. to help get you through college), a large credit card balance generally means that you are living beyond your means
- Only ever being able to pay the minimum payment per month; this is a serious sign that your credit card debt is much more than you can handle
- Constantly transferring your credit card balance from one company to another; this generally means that you are having difficulty paying your credit card bills, you likely wouldn’t need to change providers so often
What can you do if you have credit card debt?
- Visit MABS or Citizens Information for advice on debt management
- Plan a strict budget to pay off your credit card/s over time - this may mean a serious cut in your social life or hobbies, but it will be worth it in the long run
- Cut up your credit cards - this may not be easy, but it will prevent you from spending even more money
- Talk to other people - you may feel a whole lot less alone when you find out that you are not the first person to get into credit card debt, it’s actually very common
Credit card fees
Stamp duty fee
- All credit card owners must pay stamp duty on the 1st of April every year. Stamp duty is charged on every credit card you have.
Over credit limit fee
- This is a fee charged for going over your credit limit.
Cash advance fee
- This is a charge made every time you withdraw cash.
Late payment fee
- You will have to pay this extra charge if you are late in paying the minimum payment.
Unpaid item fee
- You pay this if your payment is returned, i.e. if a cheque bounces or a direct debit does not go through.
Foreign exchange fee
- This is a charge for every transaction or cash withdrawal not in euros.
Some people switch credit card companies to take advantage of lower interest rates. However, it is important to note that this lower interest rate generally only applies to balance transfers for a short period of time. You should also close your old credit card account after you transfer to a new company. Otherwise you will be charged stamp duty on the old account every year.