Many consumers find their mailboxes crammed with credit-card offers most days, hawking low introductory rates, no annual fees, free miles or sky-high credit lines. They urge consumers to transfer balances or use the enclosed checks to take a vacation or build an addition to the house.
Some offers sound good. But how's a consumer to separate the deals from the hype? Does it make sense to take advantage of introductory rates and credit-hop from bank to bank? How can cardholders tell if they're heading for trouble?
Experts say consumers can get into difficulty if they look at their charge cards as a passport to a lifestyle they could not otherwise afford.
Consumers can use credit cards wisely, first of all, by reminding themselves that credit is a loan they have to repay with interest, said Bill Keating, who teaches finance and personal finance courses as a professor in the Johns Hopkins University's graduate business program and as an instructor at Montgomery College in Rockville.
"When you charge something, you are technically borrowing money," Keating said. "Few people make that association. There is a cost associated with borrowing money."
Those who do use their credit cards regularly should shop around, looking for credit-card features that best fit their financial situation, experts say. The interest rate is usually, but not necessarily, the most important factor, said Robert B. McKinley, president of CardWeb.com Inc., a Frederick company that tracks the credit-card industry for banks and consumers.
For consumers who carry a balance from month to month, the interest rate is far more important than any other perks or features, he said.
"If you're paying 17 or 18 percent, and you have reasonably good credit, that's too much to pay in this market," McKinley said. "You should be paying 12 to 13" percent, or about four or five percentage points above the prime rate.
Consumers should not be misled by introductory rates, which usually end after six or nine months, said James Godfrey, executive vice president of Consumer Credit Counseling Service of Maryland and Delaware Inc.
"You need to know how high the interest rate is going to go," Godfrey said. He urges consumers to pay off the entire balance each month, "but if you can't, make sure you pay more than the minimum to get the charge paid off sooner."
After the interest rate, consumers who carry balances should consider the bank's annual fee and, thirdly, any incentives, McKinley said. But it may not be worth it to pay a higher rate just to get free miles, credit toward groceries or other givebacks, he said.
"If you're carrying a balance, but overpaying the interest by 5 percent, you are more than compensating for those miles," McKinley said. "If you're revolving a balance and paying 18 percent, they are paying you 1 to 2 percent of the purchase back, but you're being charged 5 percent too much. The consumers who do best on rewards pay off in full each month and avoid the interest charges."
Cards that offer the lowest interest rates -- not including introductory or promotional rates -- sometimes have drawbacks as well, McKinley said. Banks that issue those cards typically approve very few applicants -- sometimes fewer than 10 percent -- offer conservative credit lines of $1,000 or less and charge annual fees of $30 to $40.
Some consumers have turned to rate hopping, staying with a card just until a low introductory rate goes up, then transferring the balance to another card with a low-interest promotional rate.
"If you're getting some breathing room on the balance and want to pay it off in a couple months, you could do that," McKinley said.
But he warned that consumers who play that game need to read the fine print. The offer may say 2.9 percent in large type, but it might apply only to balance transfers, not purchases. Some companies then charge a 3 percent balance transfer fee.
"Consumers may be drawn to the rate and have serious intentions of making a dent in the debt, but the bank is banking on you hanging around beyond that period," McKinley said. "They're offering aggressive rates, but if you make a mistake they will take the rate away and slap on high late fees, over-limit fees, all kinds of fees. If you do get a good rate, protect that rate by playing by their rules."
Another downside to rate-hopping is all the activity it creates in a person's credit file, he said, adding that, "If you're going to do the rate-hopping game, get an introductory rate that lasts about a year."
A consumer who uses more and more of his income, has to borrow money or has to constantly turn to savings to pay credit debt is heading for credit trouble, Godfrey said. Other signs include keeping the balance close to the credit limit and making only a minimum payment each month, he said. In those cases, Consumer Credit Counseling can help for free, Godfrey said. Counselors help consumers analyze their finances and create a budget.
"We would take a look at the outstanding credit obligations and see how much [income] is left over," Godfrey said. "If there is not enough money for living needs afterward to pay credit obligations, we absolutely encourage them to stop using credit cards. If the situation is dire enough, we recommend they go into a debt-management program."
In such a program, the counselors contact creditors on the consumer's behalf and negotiate lower monthly payments or lower interest rates, Godfrey said.
"They're very cooperative," he said. "Banks understand that people get themselves into debt difficulties, whether it's from the loss of a job or medical expenses. The creditors are always willing to try to work something out."