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Credit card company "gifts" will cost you

While free "gifts" from credit card companies and department stores might seem like great offers, they are diasters waiting to happen. Offers of raised credit limits or payment delays are short-term fixes that result in long-term debt and damaged credit.

Aside from the debt you can accumulate, access to large amounts of credit can hurt your chances of getting a mortgage or some other necessary financing. A loan officer may think that after you buy the house you will be tempted to use all that credit to furnish it, and default on your home loan.

To protect your finances, avoid the following offers.

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Limit department store cards
Department store cards don't have to be shunned altogether, says Linda Sherry, spokeswoman for Consumer Action, a national nonprofit organization. "If you're loyal to a department store, there's no reason to avoid having one or two store cards if you pay them in full every month. Having the card may entitle you to special discounts or pre-public markdown sales, which some people find useful."

"What's important to remember is that store cards tend to have higher interest rates than bank cards. Since interest rates on store cards aren't tied to credit scores, like bank cards, every one pays the same interest rate on store cards regardless of their credit history," says Sherry.

Department store credit cards typically charge 21 percent to 29 percent interest. There are no teaser rates, no zero percent APRs for a while.

You must pay these cards on time, or risk paying an even higher interest rate, and avoid carrying a revolving balance. You should also avoid offers to increase your credit line.

Skip those skip payment offers
Another little present is the opportunity to skip a payment or defer payments on a new purchase for 30 to 90 days. Department stores often do this around the holidays for big-ticket items.

"Some people might find this helpful," says Sherry, "but remember that the interest accrues as usual and if you don't pay it for a month, it increases your balance."

By the time you start making payments, the minimum is so much higher, many people find they can't make it.

Experts advise saying "thanks, but no thanks" to skip-payment offers, especially if you are close to maxing out your credit limit. The monthly interest accrued can put you over your limit, and then you get charged an over-the-limit fee. Don't take payment holidays. They're not in consumers' best interests at all.

Minuscule monthly payments look like a relief but again, the creditor is the only one benefiting in the long run.

Sherry recommends that cardholders pay the minimum balance, plus as much extra as they can afford, every month. Otherwise they'll be in debt for years, even for a balance of several hundred dollars.

When minimum payment isn't enough
Even if you go over your credit limit, card companies will sometimes require a minimum payment that is not enough to bring you under the limit.

"This practice can be very unfair, especially since the bigger the balance the more interest is due," says Gary Klein, author of Surviving Debt: A Guide for Consumers. "It makes it hard for people who are having financial problems to get back on their feet."

Another enticement that might be crowding your mailbox is an invitation to transfer balances to a new card. These are tricky. Balance transfer offers typically come with a super-low introductory rate for anywhere from six months to one year..

A zero percent to 6 percent APR holds a strong appeal, but a close look at the fine print reveals pitfalls. New purchases are subject to a much higher rate. The low-rate balance must be paid off first, while the purchases you made at 14 percent or higher accrue more interest.

"It's called the payment hierarchy and it's very sneaky," says Linda Sherry, spokeswoman for Consumer Action.

If the transferred amount is not paid off before the teaser rate expires, you could end up paying more than you would have had you kept the balance on the old card. Consumers should try to get a low rate that is fixed until the balance is paid.

Beware balance transfers
Balance transfers can have another hidden hit. Some of them are treated like cash advances, for which banks usually charge a fee of 2.5 percent to 5 percent of the amount transferred.

"I had a complaint from a First USA cardholder who was told he was such a good customer that he could transfer a $9,900 balance," says Sherry. "He did, and it cost him something like $300."

Cash advances also are charged a higher interest rate and carry no grace period.

The best thing consumers can do is set a budget. Set spending limits, put aside cash and make sure there is enough money to cover emergencies.

The convenience of credit cards is what makes them so alluring. It's so easy to say you'll worry about it later.

But (later) people start realizing, 'Oh no, I'm never going to get out of this.'


-- Updated: Nov. 6, 2003

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