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.
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.”
about three out of five American households (61 percent)
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
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
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.
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.
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.”
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.
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
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