Wednesday, November 12, 2003

Tips for managing your credit card debt

As you've probably noticed, despite a slight recent up-tick, mortgage interest rates are still flying at their lowest levels in decades. You've no doubt observed, however, that your credit card rates have not followed suit.

What gives? Why shouldn't you be getting the same great rate on your plastic that you've been able to achieve on your mortgage loan?

"The short explanation," said Richard Roll, president of the American Homeowners Association, "is that credit card lenders have a larger amount of marketing and administrative costs that go into setting their interest rates than mortgage bankers. That's why it's so important for homeowners and others to manage their credit card debt and payments carefully, to keep these rates at their lowest possible level. It's easy to develop a financial problem from which it can be expensive to recover."

Today's average credit card rate is 14.94 percent and the average household that has at least one credit card owes a balance of $8,900.

"So, although you may be saving a bundle on mortgage interest these days," Roll said, "if you are carrying a big balance on your credit card, you're doing yourself no financial favors. You should find ways to do a better job of managing your credit card debt."

The more complex explanation of the disconnect between mortgage and credit card rates goes something like this: Credit card companies say the default rate among consumers has been on the rise, even while the Federal Reserve has been dropping the prime rate - the index that must be used by mortgage bankers to set their interest rates.

The trend toward poor consumer credit management, credit card lenders say, has lead to generally increased rates across the board. Punitive rates for poor credit behavior can go as high as 30 percent.

"Careless consumers, who don't pay on time, seek bankruptcy protection, or who over-extend their credit limits can expect to their rates go up sharply," said Roll. "On the other hand, careful consumers, who mind their financial p's and q's, can still get excellent credit card rates."

About 55 percent of the available credit card market offers their best customers variable-rate plastic, based on the current prime rate, plus whatever over-prime a particular card company wants to charge. So, technically, the Federal Reserve does have some impact on credit card rates.

"These are some of the best credit card deals for consumers," Roll said. "Good rates are a reward for good credit management."

Even the so-called "fixed-rate" credit cards are subtly impacted by the prime rate, because of its effect on the cost of doing business for credit card companies, as well as mortgage bankers.

Two of the best strategic tips Roll recommends for managing your credit card debt wisely are:

• Talk to your credit card lender, if your credit performance is good or has improved. A study conducted by the Public Interest Research Group indicates that more than 55 percent of those who take the time to speak with their lenders receive reduced rates.
• Prepare for seasonal low rate offers. Credit card companies usually start to make low-rate limited time offers to their best customers starting in January. In order to look like a good prospect for those offers, work to pay down your credit between now and then.

For further useful information on every aspect of homeownership, visit www.AHAHome.com.

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