April 30, 2008
Wednesday

Yet one more reason to avoid using credit cards: Some companies are upping interest rates, even for on-time paying customers, to in effect punish those with good credit to make up bank losses for bad.

Yep, the mortgage loans that ended up in foreclosure, adversely impacting the financial community in its bottom line, are affecting consumers who pay their mortgage bills, pay their credit cards bills or even some who are struggling with higher fuel and food costs, but still managing to honor their obligations. They are stretching their budgets with credit cards, digging themselves in deeper. And as we all know, most of the time a company will simply increase your credit limit, once you reach it, to allow even more debt and even more interest to accrue on that debt.

And now with steeper fees on those cards and in some cases, interest rates doubling, consumers who are on the edge may find themselves falling into default as a result.

Meanwhile, other companies continue offering lower "introductory" rates, tempting consumers of high-cost cards to make the switch -- to a company that will likely bump rates once they have you hooked.

According to a late February report on CNN, Americans put $2.2 trillion on their credit cards last year. In addition, the rate of consumers who are paying late has steadily increased each of the last five years. But it's not just the principal -- those purchases at holiday times and extra eating out while on vacation -- that should be of concern. CNN reports that a $2,000 balance at a 14 percent interest rate will take more than 14 years to pay off if you make only the minimum payments. And sadly, that's what many of us do, either by design or default.

That's right; 14 years to pay off that big-screen TV or the latest in washer/dryer combinations, all of which will be worn out by the time the debt is paid -- probably before.

The CNN report quotes John Ulzheimer of Credit.com as noting that even if you are paying off the debt in the proper manner, having a balance of more than 50 percent of your card limit can impact your credit in the worst way, lowering your "credit score" and sending up cautions to companies when you try to obtain a car loan or other financing.

But not all the news from the CNN report is bad. Ulzheimer also says good customers with good credit have the opportunity to negotiate with their credit card companies for a better rate.

Although the cynic in us wants to think the companies prefer those customers who only pay the minimum (and thus generate more income for the company), surely there are companies out there that realize good customers are worth keeping. And if you don't believe that, keep a count of how many offers you get in the mail after canceling a card you don't use anymore.

On that subject, Ulzheimer says don't cancel paid-off cards. A long credit history is apparently a good sign to future creditors, he claims. (Other experts may feel differently. We've heard for some time now that to hold all those cards, even without balances, makes a potential creditor cringe, thinking you might suddenly go wild and run them all up to their limits, thus putting their payments in jeopardy.) The best move? Pay off your credit cards as quickly as you can, then vow to do as all the experts advise: Keep them for emergencies, never holding balances more than 10 percent of your limit.

And hey, here's a novel approach. If you really need a new washer and dryer, don't go for the highest-price, mega-thrilling and envy-producing version from all the laundry handlers in your neighborhood. Buy only what you need. Maybe even save for it.

I know -- it sounds drastic -- but give it a try.

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Ketchikan, Alaska

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