Credit card company 'gifts'
often just cost you more in fees
This is the time of year when
banks and department stores start to pour on the goodwill, offering
gifts to help you have a happy holiday.
These friendly favors have many
disguises, but they all purport to offer savings and convenience. And
they might -- for a few days.
Then the months drag on, and
you're still paying for that stupid DVD player. By the time the
Christmas tree is dragged out to the curb, the creditors are the only
ones still celebrating. Knowing the traps of tempting card offers,
coupled with budgeting and self-restraint, can help you start off the
New Year on a lighter note.
According to a 1998 survey by
the American Bankers Association, most people think it will take about
three months to pay off their holiday debt.
"It usually takes about six,"
says ABA spokeswoman Patricia Boerger. "Two-thirds of them don't have a
budget for holiday spending."
credit card issuers' gifts
Consumers who don't want a financial holiday
hangover that lingers until July are advised to decline early "gifts"
from the credit card issuers.
For many people, the worst
thing to do this time of year is to acquire another piece of plastic.
This is a big temptation, but one to avoid if you already have a charge
card or two. The consensus among financial advisers is that a pair is
"One or two, that's it," says
Debbie Brooks, vice president of Credit Card Management Services, a
West Palm Beach, Fla.-based company that helps people with mountains of
"One card should be reserved
for emergencies only. Then you should have another lower-rate card that
you use for a credit line."
The exception is if you are
obtaining a lower rate card as a replacement. "If you are going to put
another card in your wallet, cancel at least one other card," advises
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.
department store cards
Department store cards should be shunned
altogether, Brooks says, because they typically charge 18 percent to 22
"There is no break with those
cards," she says. "There are no teaser rates, no 0 percent APRs for a
while. They're atrocious."
You should also avoid offers to
increase your credit line, another ploy that becomes common around the
Card companies often do this
without asking, and can be very creative in seducing you to use it. For
example, Citibank, taking advantage of an anticipated explosion this
year in Internet spending, has invited about 25 percent of its 40
million cardholders to apply for a separate line of credit for online
is just another gimmick, a creative marketing tool," says Sharon Rich,
a psychologist and financial adviser with Womoney in Belmont, Mass. "I
worry that card companies are not being responsible lenders."
Some banks even slip in a fee
to raise your credit limit.
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
"These can kill you with
finance charges," Brooks warns. "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.
Credit card checklist
- Avoid high-interest department store
- Decline pre-holiday offers from card
companies to increase your credit limit.
- Don't accept opportunities to skip a
monthly payment or defer payments on a holiday purchase.
- Never pay less than 2.5 percent of your
balance, even if the minimum payment requirement is lower.
- Be aware of balance transfer traps. Read
the fine print closely if you are considering such an offer.
- Set a holiday spending limit and pay cash
whenever possible. If you must use credit, budget for higher monthly
"The interest can put you over,
and then you get an over-the-limit fee," says Holly Anderson,
spokeswoman for the National Consumers League. "Don't take those
payment holidays. They are not in consumers' best interests at all."
Minuscule monthly payments look
like a relief around the holidays, too, but again, the creditor is the
only one benefiting in the long run.
"People say, 'Oh, this is such
a good company. The payments are so low,' " Brooks says. "I've seen
some of them require only 1 percent of the balance. You end up paying
$5 toward the principal and the rest is interest."
She recommends consumers pay at
least 2.5 percent of the balance each month.
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 of the National Consumer Law Center and 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
start 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 no more than six months.
"Usually this time of year you
start to see more of those teaser rates," Brooks says.
A 0 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 holiday gifts you bought at
14 percent or higher accrue more interest.
"It's called the payment
hierarchy and it's very sneaky," says Linda Sherry, spokeswoman for
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
Balance transfers can have another hidden hit. Some of them are treated
like cash advances, for which banks usually charge a fee of 2 percent
to 4 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
before the holidays is budget. Set spending limits, put aside cash and
make sure there is enough to meet higher minimum payments that will
start rolling around in January.
"The convenience of credit
cards is what makes them so alluring," Brooks says. "It's so easy to
say you'll worry about it later.
"But in February and March,
people start realizing, 'Oh my God. I'm never going to get out of
-- Posted: Nov. 24,