Credit card company 'gifts'
often just cost you more in fees
By Libby Wells • Bankrate.com

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."

Decline 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 plenty.

"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 debt.

"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 Brooks.

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.

Shun department store cards
Department store cards should be shunned altogether, Brooks says, because they typically charge 18 percent to 22 percent interest.

"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 holidays.

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 shopping.

"This 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.

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.

"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.

"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.

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 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 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 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 this.' "

-- Posted: Nov. 24, 1999