Corralling the Credit Card

I have never paid a penny in credit card interest, in fact I have even used cards to increase my savings by taking advantage of interest free periods and linked high interest savings accounts. I have no personal issues with them as an aid to budgeting.

But this doesn't mean that I'd don't think they are very dangerous. We all know how easy it can be to get caught in the "minimum payment" trap, and how many people do so.

TOTAL CREDIT CARD DEBT IN NOVEMBER 2014 WAS £61.0BN. PER HOUSEHOLD THIS IS £2,308 – FOR A CREDIT CARD BEARING THE AVERAGE INTEREST, IT WOULD TAKE 25 YEARS AND 4 MONTHS TO REPAY IF YOU MADE ONLY THE MINIMUM REPAYMENT EACH MONTH. THE MINIMUM REPAYMENT IN THE FIRST MONTH WOULD BE £55, BUT REDUCES EACH MONTH. IF YOU PAID £55 EVERYMONTH, THE DEBT WOULD BE CLEARED IN AROUND 5 YEARS AND 5 MONTHS. 
(The Money Charity)

The problem is made much worse by the fact that people who should not be given credit are routinely allowed to take out several cards in the full expectation that they will not pay off the debt and will be caught in this trap. Personal responsibility is one thing, and of course it's relevant here, but surely the financial sector should be more highly regulated. This much personal debt can't be good for the economic (or psychological) health of the nation.

The other side of the coin is the fact that having no credit record can be a real problem and the easiest way to get one is to get yourself a credit card. People who worry that they will not be able to manage a card and that they will be tempted to overspend have to work round this, or give in and get one.

I have had reason to think about these things recently because someone close to me has just revealed that they have a very large credit card debt that they can see no way of paying. The all round worry and distress that this is causing (and has been causing for some time) makes me very angry because it isn't debt built up buying expensive holidays and meals out. It's debt built up due to a low income combined with very high energy bills and the fact that living just a little over income has been turned into a big debt by interest-greedy card companies. I know that debt like this doesn't happen unless someone isn't in control of their budget (as we all should be) but personal failings in this area should not be allowed to become someone else's (large) profit margins. It simply isn't an ethical business model.

In other news, but also credit card related, I have been thinking about my own credit card spending and I have come to the conclusion that I should be keeping more of an eye on it. We pay for most things on credit card. In fact everything goes on them  that isn't paid for by DD or SO (we have 2 cards each) and we generally use them in preference to cash wherever possible. Given that this is the case you would presume that I know what % of the spending goes where? Wrong. I really don't know (although I do guess - not quite the same thing :-))  and I've been recently been prompted by TFSs Bloodbath post to find some way to check this out. (It's highly likely that my socialising spending is way up there too - maybe some way beyond.)

I am working towards a retirement "Number" that is based on what we spend now (minus savings and pension payments) which works out at £2380 per month. The credit card bills currently make up between 40% and 70% of that figure. It varies so much because we use them for holiday payments etc. I have stuck a pin in a number somewhere in the middle and assessed what we are spending as £1450 on "average". But I'm not even tracking this so how can I know? There's a big gap in my budgeting here that I need to address. 

Yet another spreadsheet I'm afraid. But, in the light of recent experience, credit card spending is one area that definitely needs constant care, control and containment.

Missing the "Not So" Obvious

We have a Halifax Online Saver account attached to our main current account which is paying an introductory interest rate of 1.25% for the first year. This rate will soon be coming to an end and we'll be back down to 0.25%. There's not a lot of cash in there as it just holds our pre-emergency fund - ie for when the current account needs topping up a bit if we have an expensive month. Therefore it's pretty key that this money is easily accessible and instantly transferable into the current account. Currently the balance is around £5,500.

I have been thinking about what to do with this cash now Halifax will be dropping the interest rate and I was considering opening another of the higher rate current/savings accounts (we already have a joint Santander 123) when it suddenly dawned on me that the answer was (seemingly) obvious.

Last year I took up a M&S current account and credit card. I shop there a lot and this has definitely been a good move as the points I have earned have gained me plenty of money off vouchers and special offers. I have also been able to take advantage of a 6% regular savings account which is limited to £250 a month for one year (interest paid at the end of the term). The M&S credit card is interest free for 18 months so I have been saving my £250 a month rather than paying it all off knowing that I will be able to do so when the savings account matures whilst gaining the interest along the way. ("Stoozing" the card as I believe it is called).

It then occurred to me that surely the best action would be to pay off the £2,300 credit card balance using some of the cash in the Halifax saver. On the surface this feels like it would be a good move - my basic "commonsense" tells me that this way I will be gaining 6% on the cash and I will come out better off than if I continue to save the money and pay off the card at the end of the year as I originally planned. But is this true? Is there really any benefit to be gained? Don't I get exactly the same benefit either way?

What this exercise has shown me is that although there are lots of cases where we do ignore the obvious in money matters - paying off mortgages when we would be better to keep the low rate of debt and use the money elsewhere, being tempted by BOGOF offers when we didn't even want the "one", putting money into very low rate cash ISAs when there are current accounts paying better interest rates, racking up credit card debt and putting money into low rate savings accounts at the same time, the list goes on and on - there are also cases where our intuition is well and truly fooled by the mechanics of finance.

I am reminded of those "Magic Eye" puzzles which were popular a few years ago where you had to train yourself to squint in order to be able to see what was hidden inside the pattern.

Despite the fact that numerical literacy is generally of a fairly high level in this country some of the basic rules of how money "works" are not obvious, although they are (of course) always logical. This seems to be the root of the problem. We may not struggle with simple numbers, and we can be taught the rules that help us deal with them fairly easily, but the laws of logic are a little trickier to formalise, grasp and apply to real life. We can end up going round in circles and not actually doing anything because the best route isn't actually all that clear. It's easier to just concentrate on one part of the picture at a time rather than try to see it as a whole, work out how the bits interact and act accordingly.

As far as my dilemma goes I'm pretty sure that I'm only going to earn my 6% on the 12 x £250 payments once, so it doesn't really matter which money I use to get it (does anyone disagree?). In any case I will still be left with the problem of finding some way of getting a little interest from what's left over without giving myself too much hassle as regards managing it. Back to the drawing board.

(By the way my ISA transfer has finally completed and I put in a sell order for around £10,000 worth of my CIS UK Growth fund yesterday - I'll be double checking my strategy for what to buy with the money this weekend against Tim Hales and Monevator - hope I can do it without having to squint - those Magic Eye puzzles always gave me headaches :-))

Beating the Banker (Or At Least Putting Up a Fight)

Spending wisely is just as important as investing well or saving hard.

This is something that has only just started to dawn on me and I would love to be able to provide myself with some hard facts and figures to back up this newly discovered and enlightening realisation. So I've been working on a few calculations based on our previously rather chaotic monthly budget and tried to assess how the changes I have started to put in place are making a difference.

Firstly - How we pay for things:

We have no mortgage but pay most other regular bills via Direct Debit or Standing Order from our two joint current accounts (Halifax and Santander 123). I set up the Santander account a few months ago to hold some of my husband's pension lump sum (3% interest) and to take advantage of the cashback it offers.

We tend to put most of our shopping (food, household stuff, clothes, cosmetics, travelling expenses etc) onto credit cards. I currently have a M&S 0% interest card as I spend a fair amount there on a regular basis. This is a recent acquisition (part of my drive to get "value" out of my spending) and I also took up a M&S current account which came with a 6% regular saving account at the same time. I'm making a real effort to get back at least some of the profit I've leaked into M&S over the years.

Additionally we have a Halifax Platinum card with a high credit limit (£14,000) for larger purchases and my husband has just started using a Santander CashBack card for everyday groceries (1% cashback) and petrol (3% cashback).

We pay back all cards in full each month (in effect, although I am using the M&S deposit account to hold some of the money eventually destined to pay off the card when the 0% interest period comes to an end, so I am running a balance on that one -  my small stab at "stoozing" as I like the idea of turning things in our favour a little, rather than the banks', once in a while, but I don't have the nerve for the heavy stuff).

What this all means

It is difficult to put an accurate figure on the changes I have made to maximise the "value" of the current accounts and credit cards and what they can give us in terms of points, credit and 0% interest but I've done a very quick and dirty on the figures and I reckon we're about £785 a year better off:

Extra Interest from Santander 123 as compared to Halifax Online Saver: £500
Interest from M&S Regular Saver: £85
CashBack from Santander cards/account: £100 (after charges)
Points/vouchers/discounts from M&S: £100 (after charges)

That may not sound much but it would actually go a long way towards paying for an extra week's holiday or, if I add it to my investments at the rate of £65 per month it gives me:

After 6 years, you would have £96,553

How much will you invest each month? * 

For how many years? 

Is there an initial lump sum? * 

What is your expected rate of return? 

So, it actually pushed me up past my target :-)

Already I'm looking at being able to reduce the time that I have to stay at work to 5 years, I just need to find a little more to save. I really don't think that this should be too difficult.

After 5 years, you would have £86,180

How much will you invest each month? * 

For how many years? 

Is there an initial lump sum? * 

What is your expected rate of return? 

(Thanks again to motleyfool.co.uk for providing the calculations).