For back-to-school costs, debt is not the main issue, it’s how debt is managed!
It’s that time of year and with many of the leading consumer brands airing their back-to-school offers, parents will find it hard to escape that the season of spending is upon them.
According to a number of timely surveys, the cost of back-to-schools can range from €1,000 to €1,300 per child depending on whether they are primary or secondary school students. In fact, some of the reports succeed in painting a financially distressed situation for lots of hard-working parents across Ireland.
Raising children is expensive, there is no escaping that.
But what can make the overall cost a lot higher is how debt to cover the cost of back-to-school is managed.
Understanding and minimising the cost of debt
For example, if a parent borrows just €500 on a credit card to cover some of the cost of the back-to-school purchases, if those are repaid quickly, the cost of interest can be minimal, perhaps as little as €20 or €30 if repaid over 3 – 4 months.
However, if the €500 debt is repaid using a minimum payment option, the total cost of interest will be much higher. In fact, it could cost close to another €500 in total interest charges and take anywhere up to 7 – 10 years to repay in full depending on the type of credit card, the total cost of interest and the minimum payment stipulations.
When it comes to moneylenders, the APR quoted (this is the real cost of money expressed on an annual basis) is expensive. Even those regulated by the Central Bank of Ireland quote APRs’ close to 200%; personal loans typically cost about 12% APR. For some families, these are the only options available because they may not have the credit history to qualify for a personal loan, overdraft or credit card. If moneylenders are used, it is important those loans are repaid on time in order to ensure against late fees and penalties which can push up the cost of borrowing significantly.
Planning is key!
Ultimately, planning is the key to managing back to school costs. For parents, it is the central to ensuring they have sufficient money saved to cover all of the back to school expenses and avoid the use of credit to bridge any gaps. But in order to put a sound savings plan in place, it is important that parents identify how much they need to save each month and for how long. If for example, they can save €50 per month, it will take 20 months to save €1,000. If they can save more, it will take less time.
Pinching the pennies
For parents that are facing the back to school crunch, some simple tips they need to keep in mind:
- Use credit wisely – overdrafts and credit cards are among the most accessible forms of credit available to parents. If they need to use them, ensure they stay within their credit limits.
- Pay on time each month – if they don’t, this can impact their personal credit scores.
- Repay sooner than later. When it comes to credit card debt, if borrowers can repay over a few months as opposed to using the minimum payment option, they can cut the cost of interest substantially.
- Claim back where they can – annually, an estimated €700 Million in medical expenses tax relief goes unclaimed by Irish people. It is a simple process to reclaim so for families that have not done so, reclaim where they are entitled.
- Use book rental and shop early – Many schools operate very successful textbook rental schemes to managing the cost of books in primary schools. Additionally, for parents, it is also essential they shop early for uniform, clothing, footwear and other stationary costs; last-minute pressure buying can mean missed value and increased shipping costs if forced to buy from online or remote sellers.
Back-to-school time is expensive for all parents but with planning and careful management, those costs can be managed to ensure parents do not pay over the odds.
Frank Conway is founder of Moneywhizz.org, the financial education initiative. He works with parents, students and schools across Ireland in the promotion of better money habits.