Bad Credit Loans:Credit Cards - Are You Playing Right?

Are you playing your credit cards right?

Not since Mark Twain cruised the mighty Mississippi have people been more interested in cards . . . credit cards, that is. Offers for new accounts stuff mailboxes, slip from magazines and fill the airwaves.

But if you’ve been charging like the Light Brigade, you’re not alone. According to Ram Research, a Frederick, Maryland, credit card industry research firm, American consumers charged at a record pace through the first nine months of 1995.

This year will see further changes in the credit card industry, not all of them good news for those who shop till they drop. Issuers will approve fewer cards for those applying for their most attractive rates, introductory or “teaser” rates will edge up from an average of 9 percent to 10 percent, and so- licitations to those with marginal credit records will fall dramatically. Those who pay bills late or are delinquent will see some issuers lowering their credit lines; other issuers will punish these accounts with high interest rates, reduced grace periods and higher late fees.

But if you’ve forgotten what cash looks like and hoard your frequent flier miles like King Midas, you don’t have to give up your card collection. Here are some strategies you can’t afford to pass up.

Card sharps
The trick to getting the most from your credit cards is to select the ones that are right for how you spend, pay and keep track of your purchases. If you have an impeccable credit history and low total outstanding debt, and you keep small balances on your accounts, consider low-rate credit cards. They offer limited services and below-average credit lines, but you can expect to pay one-third to one-half the average interest rate.

If you pay your balance in full each month, your card’s interest rate doesn’t matter. Choose a card with no annual fee or one with rebates.

If your credit history is good, you regularly carry a balance and you are paying interest rates in excess of 15 percent, consider switching to one of the low-rate standard or low-rate gold cards listed in the chart on page 66.

Be warned, however: Having too many credit cards can be dangerous to your financial health. Too many open lines of credit can impair your ability to apply for the best rates and could cause some issuers to declare you a high-risk account and charge you a much higher interest rate. If current low mortgage rates are tempting you to refinance your home, too many credit lines can stymie your application. As a rule of thumb, avoid owing more than 20 percent of your gross income on credit cards, and keep your total credit card line under 50 percent of your gross income.

SOMETHING FOR NOTHING

“I can get it for you wholesale” is the battle cry of the shopper’s republic–and “I can get it for you for free” is even better. According to Ram Research, the concept of giving cardholders rebates came to fruition in the 1980s with the introduction of airline bank credit cards and the creation of the Discover card’s cash-back program.

But rebate cards come in many other flavors. In addition to airline mileage cards, there are telephone company calling cards, automobile rebate cards, gasoline rebate cards, grocery rebate cards, investment or savings rebate cards and more. How do you find the best deal?

First, select a card with rebates on something you really use; then compare the interest rate and annual fees to other cards you carry or that are available. Robert McKinley, president of Ram Research, says that for entrepreneurs, rebate cards can really pay off–as long as you pay the bill in full each month.

“If you carry a balance of more than $3,000, you’ll almost always be better off finding the lowest-rate card available to you,” McKinley advises. “Paying an 18 percent interest rate [on a rebate card] that earns a 1 percent cash-back bonus is no bargain compared with paying a 12 percent rate with no cash-back program.”

If you carry a balance, you can still get the benefits of a rebate program by transferring the balance each month to a low-rate card or credit line. This can help you avoid interest rates of 17 percent or more on some rebate cards.

PANDORA’S BOX
If all this information makes you anxious to start switching, beware the offer that sounds too good to be true. Study the lowly disclosure box that appears on the back of every credit card application. If any of the following conditions fly out of that box, put a lid on that offer–fast!

1. Penalty interest. If you fail to meet the requirements of the account (by exceeding the credit limit or making late payments, for example) your interest can rise, sometimes as high as 30 percent. Credit card issuers don’t have to spell out when these rates go into effect, so before you sign up, call and ask about penalties.

2. High annual fees. There are so many low-fee and no-fee cards out there, why pay through the nose?

3. Little or no grace period. If your card doesn’t have a grace period, you’ll start paying interest the day you make a purchase.

4. Balance transfer restrictions. Some cards limit the amount you can transfer from one card to another. Others set a “teaser rate” at a low interest level for the first six months or year you have the card. Watch out when this rate expires.

5. Cash advance terms. Cards may charge higher interest rates for cash advances–and they don’t always disclose this in advance. Call and ask before borrowing cash.
Whether you charge a lot or a little, there’s a card for you. The trick is to make the best deal.

Lorayne C. Fiorillo is a financial advisor at Prudential Securities in Charlotte, North Carolina, and publisher of the financial newsletter Wall Street Wise. For a free copy of the newsletter, send a self-addressed, stamped envelope to Ms. Fiorillo in care of Entrepreneur magazine, 2392 Morse Ave., Irvine, CA 92714.

COPYRIGHT 1996 Entrepreneur Media, Inc.COPYRIGHT 2004 Gale Group

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