Credit card conundrum
Money for nothing?
When it comes to managing our money it really does look as if some of us are beyond help. The tragic truth is that even if we are offered a free, easy, do nothing except make a couple of phone calls way to save hundreds of pounds, we manage to muck it up.
Two high street banks announced yesterday that as of this morning they will stop offering people temporary “come join us” 0% credit cards designed to lure new customers, because, guess what, we just can’t handle them. (http://ow.ly/uEmO9)
In theory over-spenders who are drowning in credit card debt can, depending on which bank they switch to, get a 6-18 month reprieve on paying interest (on average about 13%) on their debt by switching their balance to a new 0% interest credit card. The snag is you have to remember to switch again when the honeymoon period ends, otherwise the interest rate on your new card can leap to 20%.
But with a bit of planning and thought all we have to do is carry on paying the equivalent of whatever interest we were paying on our old card into our new 0% card account and hey presto, instead of treading water, we can actually see our debt reduce, albeit for a short time – the 6, 12 or 18 months the introductory “0%” period lasts. So, if someone is carrying £2,000 of debt on their credit card (according to Aviva that is the British average – https://www.aviva.ie/) and has a bog standard credit card charging say 13% interest (again the average) and switched it to 0% interest for a year they would save, or at least not rack up, £260. Had they then paid a tenner a week off the debt as well (remembering not to take your card out shopping) by the end of the year it would be looking a much healthier £1,500. At the absolute, with an ostrich-like head in the sand approach of literally doing nothing about it, the debt would simply sit there, gathering dust not interest until the day came when the introductory period ran out. At that point your diary, laptop, phone or mum would alert you to the fact that it was time to move it again and off you would trot to another 0% card while you waited for your lottery win to come in.
Easy in theory. In practice two thirds of people who take out a 0% interest credit card not only don’t use it to reduce their debt, they use it to keep on spending, and then, when the 0% interest rate comes to an end, do nothing while the interest rates soar to up to 20%. According to the RBS’s own figures a third of their customers who switched to a 0% credit card carried on with the card for between seven months and a year after the interest rate rose to 20%. So, instead of saving £260 in a year, on average someone with a credit card debt of about £2,000 racked up £360 in interest through ignorance, panic or inertia.
So now Natwest/RBS have decided to withdraw the offer and instead replace it with a card charging 6.9% interest, plus a £24 annual fee. It’s for our own good, apparently. And sickeningly it looks as if they’re right. But in what universe does paying 6.9% interest save us more money than paying 0%? This one.
We can shop till our credit cards drop, but even then we won’t stop, perhaps that’s why it’s called a 0% interest card, because that’s about as much interest we pay to the growing bill…