Credit Cards – MABS Investigates
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?
- APR – explain it? what does interest mean?
- What does ‘a minimum payment’ mean?
- If I miss a payment or I’m late paying, what happens next?
- What transferring a balance means and if it is right for you.
What is a Credit Card?
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.
Pre-paid Credit Cards
There are also pre-paid credit cards that 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. Still, you want the security of knowing it’s already paid. Pre-paid credit cards can be expensive for withdrawing cash from an ATM, and some have monthly maintenance fees.
What’s the difference between a debit card and a credit card?
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. You pay the outstanding balance (the amount you’ve spent) back at a later date – usually when the bill comes in.
What is APR & what does interest mean?
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 typically for a limited period, for example, 6 months. It can be used as 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 sixty-six days. Be aware of your terms and conditions, though, as this does not apply to cash withdrawals in most cases. You could be charged interest on cash withdrawals 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 significantly between providers. Always check your terms and conditions so if you do find yourself in an emergency and need to withdraw cash from your credit card, you know how much it will cost you.
What is a minimum payment?
A minimum payment is an 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.
|Balance on Credit Card||€1000|
|Minimum payment (monthly)||€20|
|Length of time to clear the balance||7 years, 11 months|
It would take 7 years and 11 months just to clear the balance with interest. It really makes you think, doesn’t it? We used the CCPC Clearing your Credit Card Calculator to illustrate this example.
What happens if I miss a payment or I’m late paying?
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. Often you can be charged late fees on top of the interest. In addition, this late payment will be reflected on your credit report.
Suppose you are having difficulty making repayments to your credit card balance. In that case, 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 Whatsapp, by calling the Helpline or by contacting your local office.
What transferring a balance means and if it is right for you.
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 talk to your current credit card provider about a lower interest rate or a 0% interest period, however, 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 of over 23% is considered a moneylender. Under the Central Bank of Ireland rules lending charged above 23% APR is regarded as a high-cost form of credit. Different Central Bank of Ireland rules apply to moneylenders. You can learn more on the Central Bank page about Moneylenders.
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 not to use credit cards if possible as they are a high-cost form of credit. Still, we are aware that many people have them but don’t understand how they work. If you do have a credit card with an outstanding balance, we would advise that you try to pay it off as soon as possible. If you don’t know where to start and would like to speak with a MABS adviser, call 0818 07 2000.
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, please contact a MABS adviser. Advisers are available by phone and email and through Whatsapp. You can call the MABS National Helpline on 0818 07 2000, Monday to Friday, from 9am to 8pm or find the contact details for your local office here.
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