Shop for the best credit-card deal, and make it work for you

Your Money

December 10, 2006|By Harriet Johnson Brackey | Harriet Johnson Brackey,South Florida Sun-Sentinal

This is not exactly a bold prediction: You probably will add to your credit-card debt this holiday season.

Judging by Federal Reserve estimates, households spend 20 percent more on debt repayment today than a decade ago. That includes credit cards, loans and mortgages.

It's more important than ever to understand this growing issue - and to figure out if you can work with your credit cards or if they're working against you.

Consider these facts:

Opening accounts at the cash register can hurt.

Sure, you receive the 10 percent discount. But you may be paying a higher interest rate down the line than you could have found by shopping around for credit. "Shoppers often don't ask about the terms," said Lucy Duni, director of consumer education for TrueCredit.com, a unit of the credit bureau TransUnion.

Every time you open a store credit card, the retailer checks your credit. This is known as a hard inquiry, and it can lower your credit score by 5 points, Duni said.

Your credit score is a measure of how much risk a borrower takes lending you money. Credit-card companies use it to decide what interest rate to charge you.

You may figure knocking your score down a little won't be a big deal. You'll build your credit score up later. Maybe you will. But it might be too late.

Duni says that if you plan to buy a house or a car, you don't want to bring your score down just before you take out a big loan - you won't get the best interest rate. And you will be paying the higher rate for the life of the loan.

If your score is on the border between good and great, one hard inquiry could make a difference. Several store cards, all opened in short order during holiday shopping season, would.

Using credit cards can bust your budget.

"You spend more with credit than with cash, 15 to 30 percent more," said Robert Manning, a professor at the Rochester Institute of Technology and the author of the book, Credit Card Nation: The Consequences of America's Addiction to Credit.

Why?

There's a disconnect that happens when you pull plastic out of your wallet. "You are no longer spending based on how many hours it took you to earn the money to buy that product," he said.

How much do cards cost you?

Good luck figuring that out.

Credit-card issuers don't make it clear. They write murky disclosures, bury important terms and include unnecessary information.

Many consumers don't understand such important facts as what they'd be charged for making a late payment or what would cause their interest rate go up, says a recent study of the nation's largest card issuers by the Government Accountability Office, the investigative arm of Congress.

You might think you know your interest rate because it's in a big-type box on your credit-card agreement. But you have to learn how the balance is added up to determine your true cost.

There's a particularly insidious practice called double-cycle billing that makes it next to impossible to know what you'll be paying on a purchase. Not all cards use it, but if yours does, watch out. Read the fine print, especially the part about how the credit-card company computes your balance.

The GAO report said it can work this way: You charge $1,000 on the card. You make a payment on time of $990. The next month, you thought you'd be paying interest on the remaining $10. You're not. The card figures interest based on two payment cycles. What you owe is based in part on what you've paid off. The end result: You're charged $11.02 in interest, instead of the 11 cents you would have owed on $10.

If you mail a payment late, what happens?

It will be a lot more painful than, say, bouncing a check.

The typical credit-card penalty was $33.64 at the six big issuers that the GAO studied. More than one of three cardholders paid at least one penalty last year.

Incurring a single penalty can be reason enough for your credit-card company to switch you to its so-called default rate. And that could be 30 percent or more.

What can you do to handle credit cards wisely?

The best thing is what almost half the credit-card holders in the GAO study do: Pay off the bill in full just about every month.

For everyone else, the answer is to use the intense competition among card issuers to advantage.

Shop hard for a credit card. Don't just grab the offer that came in the mail.

Shop for a new card if yours raises rates or changes a reward package that you liked. Don't put up with double-cycle billing. And never pay an annual fee.

Harriet Johnson Brackey writes for the South Florida Sun-Sentinel.

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