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.
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.
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
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
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.
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
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