Understanding the real cost of Christmas when using credit cards

Irish families are estimated to spend in excess of €2,000 on Christmas. This includes spending for presents, food and other essentials.

That figure alone is sizeable when one factors the time it takes to earn and then save the cash. Plus, it is after-tax cash so it takes that bit longer to really save.

Of course, not everybody has €2,000 cash. Which is why some people borrow to get them over the line.

And this is where the true cost of Christmas can really add up.

Credit cards offer a really flexible means of borrowing and when managed correctly, can actually provide a low-cost or no cost means of borrowing…provided they are paid off quickly. However, this is not what a lot of people actually do. Instead, they carry a credit card balance from month to month and many opt for the minimum payment option of repayment.

Paying a credit card debt using the minimum payment, while convenient on a family budget actually cost bundle in interest, here’s why:

Let’s take a family that will spend €2,000 on Christmas. If they have €1,000 saved already, this means they use their credit card to cover the other €1,000. So, they borrow €1,000 on the credit card.

The credit card operates as follows; it charges an 18% rate of interest and it requires a minimum payment of about 2.5% of the outstanding balance. Without getting into all of the repayment mathematics, every month the borrower makes a payment to the credit card company, they also get charged interest on the outstanding balance. It’s like two steps forward and one step back.

To make a long calculation short, the €1,000 debt on the credit card can take as long as 16 years to repay and cost an additional €1,063 in extra interest. So, Christmas 2018 doesn’t cost €2,000, it actually costs €3,063 when the total cost of interest is added back in. This calculation is based on the rate of interest (18%), the minimum percentage monthly payment (2.5%) and the floor payment of €5 (which kicks in when the 2.5% produces a payment less than €5). Sounds complicated? It is!

To keep Christmas costs under control, if you have to use a credit card, look to pay it off quickly, this really is the best way of avoiding expensive interest charges.

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