Debits help ease sting of interest

Credit card companies capitalize on the fine print, which means higher interest rates and debt.
Tuesday, December 14, 2004 | 12:00 a.m. CST; updated 11:23 p.m. CDT, Saturday, July 12, 2008

Christmas is coming, the goose is getting fat — and so are most Americans’ credit card bills, although so far this holiday season debit cards have a slight edge.

The National Retail Federation estimated that 29.5 percent of consumers will use a credit card to pay for holiday purchases this year, while 34.7 percent will use a debit or check card.

Last year, 30.1 percent used credit cards for Christmas purchases while 30.7 percent used debit cards. The federation said the increase in debit use was the result of better planning and budgeting by consumers.

Some credit customers should be bracing for a New Year’s spending aftershock if credit card companies continue to take advantage of the fine print in policies that allows them to increase interest rates. Companies are opting to increase a customer’s rate not just when they fall behind on payments to the company but when a customer’s credit report changes.

“Creditors are using the option more,” said Nancy Nauser, president of Consumer Credit Counseling Service of Missouri and Kansas. “Before, they didn’t change the rate unless a customer was delinquent with them. Now, they are looking at the whole picture.”

The increase in bankruptcies over the last decade has led more creditors to look for ways to protect themselves, Nauser said. Creditors are taking the view that if a customer has become delinquent with another creditor, that customer could become delinquent with them.

“The creditors are trying to find out those customers who are at risk,” she said. “People were filing for bankruptcy that never became delinquent with them,” leaving credit card companies holding the bag.

Bridget Jeffries, client specialist with Consumer Debt Counseling in Columbia, said the increase in interest rates because of a change in a credit report is a relatively new trend for creditors.

“A couple of years ago I didn’t see any of this,” she said.

The practice of changing an interest rate because of changes in a person’s credit report is referred to as a universal default policy. A Consumer Action survey of 140 cards from 45 issuers found that 44 percent of banks have universal default policies, compared to 39 percent in 2003. The survey found penalty rates for paying late could be as high as 29 percent with the average penalty rate at 22.91 percent.

The Office of the Comptroller of the Currency, the regulator of national banks, released a statement commenting on the prevalence of interest rate increases and other practices they called unacceptable. The OCC said national banks should state the policies about changing a customer’s annual percentage rate more prominently in promotional materials.

Nauser said the fees could quickly get out of hand if the creditor increases a rate. When a company changes a rate, it can also decrease the customer’s credit limit, often placing the balance over the limit and invoking an over-limit fee.

When other creditors see a change in a consumer’s credit score, their rates can also change, Nauser said. Insurance companies are among those that base rates on a customer’s credit report, she said. “It creates a domino effect,” she said.

“Our busiest time is January to April,” Jeffries said. “Credit card bills start coming in, and business picks up.”

She said the key to holiday spending is planning ahead for how much you intend to spend and setting aside money throughout the year to pay for Christmas.

Committing to pay the debt off in six months is the best way to avoid getting stuck, Nauser said.

She calculated that if a family of four charges $3,000 to a credit card, making only minimum payments at an 18 percent interest rate, it will take 30 years to pay off the debt, which will gradually grow to $7,013. Even doubling the minimum payments, it would take nine years to pay the debt off.

A sampling of customers at the Columbia Mall on Sunday showed cash taking the lead in holiday shopping this year. Only one out of 10 people said they’d used a credit card to buy Christmas gifts.

Amy Pescaglia, 30, said she uses a credit card but tries to pay it off every month. Throughout the year she saves money in a Christmas saver account that deducts monthly from her paycheck.

“I’ll probably have a balance after Christmas,” she said after finishing her shopping at the mall. “But the balance will be small.”

Kim Holtmeyer, 31, of Columbia said she was paying with cash this Christmas.

“We spend what we can,” she said. “I don’t want to use credit because I don’t like to pay interest.”

Luray Bucko, 48, said she tries to plan ahead and pay cash for items at Christmas.

“If I can’t afford it, then I don’t need it,” she said.

When consumers get in over their head with debt, Jeffries said she and other counselors work with creditors to lower the debtor’s interest rates and draft a payment plan.

“Our goal is to set up a plan where the debt can be paid off in five years,” she said.

Nauser said the counseling service tries to look at each individual’s situation and all the options. A debt management plan should be a last resort for consumers, she said. “It can affect your credit and hurt you while you are trying to get out of it.”

Nauser herself uses credit. “I believe in credit,” she said. “But I pay it off every month.”

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