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How to Survive in the ‘Credit Card Nation’

By Robert D. Manning

Consumer credit cards are one of the most important advances of modern society. Like the PC and the internet, bank credit cards have revolutionized personal finance and, for most of us, are a convenience that would be nearly impossible to live without. How difficult would life be if we had to provide a cash deposit on a rental car, send a certified check for a hotel room, or bring large amounts of cash on business trips or vacations. Indeed, without credit cards, commerce would flow much less efficiently and “new” economy businesses such as Amazon.com, E-Bay, and Hotels.com could not even exist.

Robert D. Manning is Professor and Special Assistant to the Provost. He frequently testifies before Congress on behalf of citizen consumer rights. He is the author of Credit Card Nation (Basic Books, 2000) and his 1999 study of student credit card debt was the basis of a Sixty Minutes II program. His next book, Give Yourself Credit, is a guide to consumer credit. Recent radio interviews conducted by National Public Radio (NPR) and British Broadcast Corporation (BBC), are accessible at www.creditcardnation.com.

For “convenience” users, i.e. the 39 percent of households that pay off their credit card balances at the end of the month, the “magic of plastic” is truly miraculous since it provides free loans and other useful membership services. Various reward programs, moreover, offer free gifts and even cash rebates simply for using credit cards rather than cash. What a deal! That is why the credit card industry disparagingly refers to convenience users as “deadbeats.”

Overall, about three out of five American households (61 percent) don’t pay off their balances at the end of the month. These credit card “revolvers” essentially pay for deadbeats and generate the record profits for the credit card industry.

Although the U.S. Federal Reserve has reduced interest rates during the recent recession to historic lows, most credit card “revolvers” have received only modest relief; finance charges have fallen from an average of almost 19 percent in 1999 to about 15 percent today. Furthermore, penalty fees have jumped from $1.7 billion in 1996 to more than $9 billion in 2003.

Beware of the fine print in your contract with $35 late and overlimit fees. In real terms – after adjusting for inflation – the cost of borrowing money on credit cards (interest and fees) has nearly tripled since the onset of banking deregulation in the early 1980s. No wonder the largest banks (top 10 control 83.5 percent of the credit card market) literally flood our mailboxes and e-mail accounts with applications for “easy” money – more than 5 billion last year.

So, do you aspire to become a deadbeat? Are you interested in stretching your “Yuppie Food Stamps?” Do you want to learn how to make the “magic of plastic” work for you rather than inflating the profits of your favorite bank? If you responded “yes” to any of the above, now is the time to take my crash course on how to survive in the Credit Card Nation.

Top Ten Tips of the Credit Card Nation

1. Repeat after me, I don’t pay membership fees. If you paid a membership last year, call your friendly customer service representative and insist that the fee be waived (unless it is a frequent flier program). Otherwise, there are lots of better deals out there. Check out the range of possibilities at www.bankrate.com.

2. If you are a “revolver,” reduce the number of bank credit card accounts to a maximum of two. Keep a high-interest card that has many useful benefits such as free car rental insurance or annual itemized statements and pay these charges off in full each month. The second credit card should be a no-frills, low-interest credit card (under 9.9 percent fixed or 7.9 percent variable rate) where you maintain a monthly balance.

3. If you are a “convenience” user, be sure that the “grace” period is at least 21 days. And, resist frequent flyer reward programs with membership fees unless you charge at least $20,000 per year. For most, the best rewards are cash-back programs – at least 1 percent of all charges. If you choose a “free” gift, make sure that the delivery fees are modest.

4. Call your friendly customer service representative and demand a lower interest rate. Believe it or not, you can bargain over the phone. Play hardball and insist on talking to a supervisor, you may even get a free gift. After all, you work hard for your money, what have you got to lose? You can also contest late fees but don’t push it after the second “waiver.”

5. Now is the time to lock in on a fixed rate account, pronto. Interest rates are so low that banks have established a “floor” so that your finance charges will not fall anymore – even if the Federal Reserve lowers the rate it charges to your bank. Trust me, interest rates will rise over the next two years, including home mortgages.

6. Look out for the classic “bait and switch” maneuver. If the credit card offer sounds too good to be true, it probably is. Make sure that the credit card that you received is the one that you applied for. Banks are not obligated to inform you that they changed their minds or explain why they will not honor their previous “pre-approved” offer. Many consumers don’t realize that they have been duped until they use their new card and it is too late.

7. Monitor the low “fixed for life” interest rate that was the reason that you signed up for the credit card or transferred a balance from another credit card account. It is not unusual for the 3.9 percent rate that you started with to jump to 23.8 percent simply due to debts on other bank accounts or being late by a day on a single payment.

8. Check for “tiered” interest rates on your account balances. For example, you may have taken a cash advance that is at the highest rate (at least 19.9 percent), normal rate for purchases (12.9 percent to 14.9 percent), and low introductory “teaser” rates (O percent to 4.9 percent). Suddenly, the short-term rate expires and you want to pay it off after it jumps to 19.9 percent. The problem is that your contract specifies that your monthly payment is applied to the lowest interest rates. You may need to transfer the entire balance to another card in order to take advantage of the “magic of plastic.”

9. Cancel all of your unused bank and retail credit accounts. You probably don’t even remember what you bought with those 10 percent to 20 percent discounts that enticed you to open those retail credit accounts. Nevertheless, they are probably still “open” accounts, which means that they negatively affect your credit score since these lines of credit are calculated as potential debt obligations.

10. Don’t even think about a credit card insurance program. Unless you like to literally burn your hard-earned cash, these unemployment and disability programs are pricey and not worth the cost. In a word, they are a ripoff. Use these premiums to pay down the principal of your account balance(s).

So, how well did you learn your lessons? Are you prepared to lower your interest rates and embark on the liberating path to “deadbeat” status? Ready to assert your consumer rights and demand better customer service? Want to cross the social divide of debt and pursue the empowerment of investing?

Congratulations, and remember, choose wisely!


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