January is both the longest month, and the most expensive one. Although the spending was done before Christmas, it’s these weeks that the bills land.
And if you are one of those people who plonked the lot on overdraft, or worse, credit card, then you could be hiding behind the sofa when the bills arrive on the doormat.
Getting into debt is very easy; getting out is far more difficult, and these days there are more ways than ever to make ‘convenient’ payments for everything from a new sofa to a holiday. One of those is buy-now-pay-later (BNPL), a digital form of catalogue shopping which lets you spread out payments for an item over a few months at seemingly low, or no interest.
Targeted at costly goods which you would normally have to save up for, it is now being offered – incredibly – on clothes, groceries and even takeaways in the UK. Without doubt, that will eventually happen here too.
What this means is that the potential for consumers to have not one, but many loans on the go at the same time may tip them into unsustainable repayments, clock up fees, interest and added charges. Add in debt collection agencies and legal fees and before long your long-forgotten purchase could land you not just with a damaged credit rating (see below), but in front of a judge.
The Competition and Consumer Protection Commission (CCPC) says that BNPL can often appear “as the default payment option when buying online”, and you may have to manually select another payment method – for example your debit card, which doesn’t charge interest.
Many businesses have started to offer consumers the option to pay for smaller goods such as clothing and footwear using BNPL credit
It warns: “Traditionally, BNPL credit was mainly used to buy goods such as kitchen appliances, furniture, televisions etc and is better known as ‘in-store credit’. Now many businesses have started to offer consumers the option to pay for smaller goods such as clothing and footwear using BNPL credit.”
It reminds consumers that late fees are the business model of these companies, depending as they do, on the borrowers who forget, or can’t make their payments on time. If it looks ‘free’ there’s a charge somewhere down the line. They also charge shops a commission for flogging the service.
The CCPC offers an example of a BNPL purchase for €20. If you make the payment, usually by direct debit when it falls due, then there may be no interest. Miss it however, and you can be charged a late fee of €5. That’s a 25pc bump on the price, so hardly the bargain you thought.
The Central Bank is responsible for authorising BNPL operators like Klarna, Humm and Revolut Pay Later. It says: “Buying goods and services on credit is the same as taking out a loan even when no interest is charged. You still have to repay the credit you have borrowed, complete a credit assessment and agree a repayment plan with the provider. It may affect your ability to borrow in the future. Short-term credit agreements can include additional fees and charges which could significantly increase your instalment cost. Set up or administration fees are also common.”
Where the loan is for €500 or more, you will be entered on the Central Credit Register for all future lenders to see.
BNPL lenders make their profit from retailers enthusiastically offering spread-payment option
Across the water, where the £6.5 billion BNPL market is growing by 60pc per annum, the UK financial watchdog, the FCA, has told firms who mislead consumers on BNPL adverts by not prominently spelling out the associated fees, they could face two years in prison as it attempts to curtail “impulse debt”. Over 4,200 rogue ads were withdrawn or amended in 2022.
BNPL lenders make their profit from retailers enthusiastically offering spread-payment options, as the underwriting is lighter than from a regular bank or credit card provider. It means that some customers who would normally be denied traditional loans, could access BNPL credit and risk getting into debt.
To get rid of debt, you have to really, really hate it. Making the decision to clear it, even if it means sacrificing ‘nice things’, is a vital first step.
Rather than listing your debts starting with the biggest (the mortgage), instead list based on the interest rate charged. This would typically put the credit card at the top, followed by personal or credit union loans, PCP car loans, BNPL debt and finally, the mortgage which is ‘good’ debt, given it is asset backed at low interest.
Paying €60 per month off a €3,000 bill at 20pc interest would take an eye-watering nine years to clear
When it comes to clearing it, there are two ways to start: either over-paying the smallest loan for a few months, giving you an easy win, or tackling the highest interest-bearing loan. This is the one eating into your disposable income and denying you spending power.
Making the minimum payment isn’t enough. It’s all the bank will ask of you, but paying €60 per month off a €3,000 bill at 20pc interest would take an eye-watering nine years to clear. By over-paying each month and paying €120 instead, the loan is wiped in two years, nine months. Finally, promise yourself a year of no new impulse purchases you haven’t saved for.
Your credit report
The Central Credit Register is operated by the Central Bank.
It records loans and credit given to people and businesses so future lenders can see what debt commitments a potential borrower has. All loan providers have access to it.
It records any existing loan or credit over €500 along with the individual’s repayments – or missed repayments – including mortgages, personal loans from banks or credit unions, high-cost loans, credit cards, overdrafts, car finance or asset finance such as hire purchase.
If you apply for a new loan under €2,000 the lender can check your credit report; if the loan is for more than €2,000, they must do so.
They can also check your credit history if you’ve asked for a loan restructuring or breach your limit on a credit card.
Some debts are not included, for example arrears on utility bills or with Revenue.
A credit report is not a credit rating.
There is no score, or scale. It is up to each individual new lender to assess your ability to repay a loan. The register simply stores the information.
You can access your own credit report for free at centralcreditregister.com and if it is incorrect, amend it, add an explanation to it or have it expunged. If you cannot service a loan or have missed repayments, you may find it difficult to get credit in the future for mortgages or other loans.