Spenders Beware: Credit Card Hangover Coming
Dec. 12, 2006 — -- For many Americans, it's an annual tradition that goes hand-in-hand with eggnog and mistletoe -- millions of people will charge millions of dollars on their credit cards this holiday shopping season.
Of course, it's easy to pull out the plastic in the weeks leading up to the holidays, but much more difficult when those bills come due in 2007.
More than 115 million Americans carry monthly credit card debt, with the average American debt around $9,000, according to Cardweb.com. And many of those paying off a high balance were surprised when the minimum monthly payment due rose during the past year.
The Office of the Comptroller of the Currency, a bureau of the U.S. Treasury Department and a watchdog to protect consumers from abusive and deceptive credit card practices, cracked down with tougher guidelines on interest rates, marketing tactics, and account management practices. The higher rates will help consumers pay off their debt more quickly, but many budgets were squeezed by the new minimum payments.
The typical monthly minimum doubled -- rising from about 2 percent to 4 percent . That can equate to a hefty increase for someone paying off the average debt of $9,000 -- as much as $400 per month more.
So it's important to be conscious of the debt you're incurring to buy gifts for friends and loved ones during the holiday season.
For starters, it's best to choose a credit card that has the lowest possible annual percentage rate, or APR. Read the credit card agreement closely to find out what, if any, annual charges you'll have to pay on top of the finance charges.
Keep in mind that the annual percentage rate on your credit card can, and often will, skyrocket if you make late payments. Rates have been known to jump to as much as 30 to 40 percent, should you make a late payment. On top of this, consumers can get hit with late fees ranging from $25 to $50 and over-the-limit fees ranging from $25 to $39.
Under current credit card structures, financially strapped consumers making minimum payments each month are not able to get out from under the layer of penalties and interest rates. Federal banking officials are pressuring banks to reduce interest rates, which would be a huge victory for consumers.
If you're stuck with a card that has a high interest rate, it might be possible to call your card provider and negotiate a lower rate.
The best way to navigate the fee maze and negotiate the best rate and fairest payment terms is by calling your credit card company directly. For example, if you have good credit and a track record of paying on time and you miss one payment for any reason, a call to the card company can usually stave off any finance charges or an interest rate increase for a one-time occurrence.
In one study, more than half of the people who tried to negotiate a lower interest rate were successful with just a five-minute phone call. Last year, three "Good Morning America" staffers tried to lower their rates and were successful.
The "GMA" test found that negotiating was more successful when you had a standard credit card without incentives like frequent flier miles or cash back. It also helped to know your credit score, so you know how attractive a customer you are to the credit card company. It also helped to mention the myriad of competing credit card offers you were getting in the mail.
Negotiating a lower interest rate can save you a lot of money. For example, if you have $10,000 worth of debt and you lower the interest rate by 6 percentage points, you can save $600 a year in interest payments.
If a credit card company will not lower its rates, it may be time to consider a new credit card. There are some nonprofit groups that track credit card companies that offer low interest rates. For more information, visit www.federalreserve.gov/pubs/shop/survey.htm or www.cardweb.com/perl/cardlocator/survey/lowrate.
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