PART TWO. The GOOD: Let's Make a Deal [for Debtors] (back to table of main page) Let's face it. If you can't pay off your credit card bills at the end of the month, you're in debt. The credit card companies can call you a more customer "friendly" name like "Revolver" but, if you're like most Americans (about 60%), there's no escaping the fact that you can't pay off all of your credit card debts at the end of every month. And, don't even mention January with its post-holiday shopping bills. Right?!! Okay then, you're a Revolver. Or, as my favorite vanity license plate declares: "INDEBT 2." For you, picking a credit card requires more caution than your "convenience" friends. This is because you will pay compound interest on your mistake(s). First, the annual membership fee. Since you are paying an arm and a leg in interest charges, you don't have to worry about it. Nearly every bank will gladly waive the annual membership fee if you paid over $30 in finance charges last year. If you are currently paying an annual fee, STOP, do not pass Go, and immediately call the customer service department of your credit card company and threaten to close your account. As quickly as you can count 1, 2, 3, 4, 5 ... YAHTZEE!, a customer rep will pretend to confer with a supervisor and then report that the annual fee has been waived as a "courtesy" to you as a "valued customer." This fee will then be credited to your account on the next statement. See how easy it is to save money! And, doesn't it feel good to make the credit card companies give you back money for a change. As for the Grace Period, forget it. You don't have one if you are a Revolver. It only matters if you can pay off ALL of your charges at the end of the month. Membership Enhancements are certainly worth your attention. Depending on your personal needs, there are several features to be considered. For instance, if you travel frequently, you want car rental insurance and travel related discounts (big savings). Shoppers of 'big ticket' items should select a card with an extended manufacturers' warranty as well as purchase protection/security features--especially if you plan to buy electronic products such as stereos, televisions, and computers. Note, travel accident insurance (if your airplane crashes) and credit card registration programs (See Module 1) are not cost effective, so ignore them. This is because you are not responsible for any unauthorized purchases after notification of the loss of your credit card; your maximum financial liability is only $50 per card.11 Lastly, ask about special membership benefits. For example, some companies offer an itemized summary of your purchases at the end of the year. This is especially useful for planning your personal budget, preparing income taxes, or for explaining to your parents where your money goes.12 Last, but not least, is the finance charge. Whenever possible, choose a fixed rather than a variable interest rate credit card unless there is more than a 2.0% difference in the annual percentage rate (APR). For example, it is better to take a 11.9% (APR) fixed-rate card than a 9.9% (APR) variable-rate card. This is because the interest rates will increase in the future.13 There is no way that inflation will maintain its present 1.0% level in the long-term! And, be careful about low-rate, introductory "teaser" offers. First, check if the special rate applies to new charges or if it is only for balance transfers from other credit cards. You many end up with a higher interest rate (APR) without ever receiving a low-rate for your charges! Second, find out how long the special rate is in effect. Some offers are as short as 3 months while others are as long as 1 year. Third, make sure that you understand how much the interest rate will increase after the introductory offer expires. Is it fixed or variable? How high can it go? Remember, banks make their money after the special rate is over. Be sure to find out how greedy they are! Table 2 presents a list of some of the best deals available to college students. Note that the largest credit card companies like Citibank, Chase, First USA, MBNA, and Discover are absent. How many advertisements from these "Good Deal" companies have you seen on campus? For example, Capital One Bank aggressively markets its 9.9% fixed rate card on television but what does it really offer students? The answer is a 9.9% rate for the "introductory" six month period, and then a 17.99% variable rate thereafter. ALWAYS check carefully to be sure that your low-fixed rate "Good Deal" does NOT become a "Dastardly Deal" 6 months later!14 Note, the terms and conditions of credit card accounts are frequently changed by the corporate barons of the Credit Card Nation. Don't get mad at us if the credit card execs decide to charge you more money since we last checked. We're trying to HELP! The BAD: Dastardly Deals for Debtors Sometimes higher interest rates are justified by the wide range of membership benefits that are offered by particular credit card companies. In most cases, the current trend of rising interest rates and penalty fees are simply due to corporate greed.15Think about this for a moment. How is it possible that the cost of credit cards is rising for consumers when there are thousands of competing banks and their cost of lending money to you is so low?16 Have you looked at the interest rate on your savings account lately?!! Sadly, especially with the ongoing trends of bank mergers and acquisitions, the credit card industry defies the logic of a highly competitive market. As shown in Table 3, price gouging is rampant with many large banks charging over 19% APR.17 Many students begin with moderate interest rates (9.9% to 15.8%) and often are unaware that they have been increased dramatically. This may result from expiration of low-rate introductory offers, variable rate adjustments, or only two delinquent payments. The latter is more common than you think. Credit card companies realize that students may send late payments simply due to normal school disruptions such as semester breaks, summer vacations, and mail forwarding delays. Although they occur frequently, the penalty is excessive. For instance, if you miss a Discover card payment and do not catch up by the next payment due date, the interest rate increases from 17.4% to 22.49%!!! Similarly, The Associates Visa jumps from 17.99 to 25.99%!!! The long-term consequences of double-digit interest rates are shocking. As the "debt buster" calculator illustrates, even a reduction of only 2.0% APR reduces the pay-off of your credit card debt by several years.18 So, proceed with CAUTION. If you do NOT carefully manage your personal finances, you may end up with a Dastardly Deal by the time you graduate. Always send in your payment early so you will not be penalized with a high finance charge or late fee! Double Deal Delight: Combining Low Cost and High Benefits By now, you probably realize that it is very difficult to find one card that offers you all of the membership benefits that you want with a low interest rate. As a result, the most practical way to manage your financial needs is with two credit cards: The Double Deal Delight. However, DO NOT TRY THIS STRATEGY IF YOU HAVE PROBLEMS CONTROLLING YOUR SPENDING! First, find a low-interest rate credit card--such as a "Top Deal" from Table 2. These "Basic" or "Starter" credit cards tend to have fewer member benefits--the tradeoff for receiving a low annual interest rate (APR); remember, they can be upgraded later. On this credit card account, you should "carry" or revolve your accumulated debt. Then, get a second card that has most of the membership benefits that YOU want but usually comes with a higher annual interest rate (APR). On this account, you should have as little debt as possible. Use this card only for its membership benefits such as extended purchase protection plans. After you charge items on the second card, pay them off as fast as you can or transfer the debt to your lower interest credit card through free or low fee "balance transfers." It is for this reason that we prepared the "The [Not too] Ugly" list of Table 4. That is, moderate interest rate credit cards that have many useful membership benefits.19 Together, the combination of lowinterest credit and desired membership benefits offers you the ultimate in cost effective credit cards, the Double Deal Delight = NO ANNUAL FEEs + Low Interest Rate (APR) + Desired Membership Benefits + Rebates Lastly, a word of caution if you are not able to follow these guidelines. Should you begin accumulating debt on both credit cards, this may indicate that you are having problems managing your personal finances. At that point, it would be best for you to stop charging and reduce the credit limit on your second card. Otherwise, you may not realize the seriousness of your financial problems until you can no longer afford the minimum payments on BOTH cards.20 Please listen to this warning if you begin to slide down the slippery slope of financial distress. It may be useful for you to discuss your situation with a debt counselor.21 With this cautionary warning, you have now reached a fork in the road of our financial information program. It is our hope that you are now better prepared and more empowered to cope with your financial affairs in the Credit Card Nation. So, go forth and Choose WISELY! And, send post-cards. Or, at least an e-mail regarding our efforts to prepare you for this difficult and all too challenging journey. 11 (return to text) You should check out the module on the theft or loss of your credit card(s). "Disappearing Plastic: What Should I Do?" is a freebie. Afterall, what have you got to lose! 12 (return to text) Sometimes credit card companies will not offer you special programs unless you specifically ask the customer representative OR WORSE they will cancel them if you do not request them to be renewed! A typical example is when Chase Manhattan decided not to send out its end-ofyear statement of itemized purchases to thousands of card holders in 1997. Company representatives explained that only those customers that did not request them were deleted from the costly mailing. Yet, thousands complained that they requested the statement for use in preparing their income tax returns and still did not receive it! 13 (return to text) A "fixed" rate means that the annual percentage interest rate (APR) will not rise if the cost of borrowing money increases to the bank. In this way, your payments will not increase because of an increase in inflation or other bank policies. However, a "variable" rate means that your APR is calculated in relation to changes among the following indices: (1) prime interest rate, (2) interest rates of U.S. Treasury bonds [one, three, six, 12 months], (3) federal funds rate, (4) cost of funds, (5) Federal Reserve discount rate, and (6) other international rates. Although technically, a variable interest rate can decline, don't bet the house! With inflation at about 1%, there is little chance of a decline in the future. 14 (return to text) Table 2, The GOOD: Excellent Deals for Debtors Credit Card Company Annual Interest Rate* Annual Fee** Membership Enhancements Toll Free Telephone Aria Visa 7.9% (fixed) $0 4 website American State Bank Visa 11.9% (fixed) $0 Not Reported (800) 725-2006 Home Federal Savings & Loan Visa 10.68% (variable) $0 2, 3, 4, 5, 6, 8, 10 (704)*** 373-0400 Simmons First National Bank Visa 9.5% (fixed) $35 4,8 (800) 636-5151 USAA College Start Visa 11.65 (variable) $0 1 (800) 945-3608 The BEST of the REST: Good Deals for Debtors Credit Card Company Annual Interest Rate* Annual Fee** Membership Enhancements Toll Free Telephone BankAmericard Visa 13.74% (variable) $0 5, 7, 10 (800) 200-7119 Central Carolina Bank MasterCard 11.25 (fixed) $20 5, 10 (800) 334-1073 Commerce Advantage Visa 14.1% (variable) 6 months (fixed 6.9%) $0 4, 9 website Federal Savings Bank Visa 9.35% (variable) $33 Not Reported (800) 285-9090 First American National Bank Visa 12.5% (variable) $0 Not Reported (800) 272-7331 First National Bank of Atlanta Visa 12.4% (variable) $18 4 (800) 842-3262 Huntington National Bank Visa 8.75% (variable) $39 Not Reported (800) 237-7400 Metropolitan National Bank Visa 9.48% (variable) $25 4, 6 (501)*** 570-1023 USAA Federal Saving Bank MasterCard 12.5% (variable) $0 Not Reported (800) 922-9092 Waterhouse National Bank Visa 12.5% (variable) $0 10 (888) 771-6201 *In general, a "fixed" rate card is preferred unless the annual percentage interest rate (APR) of a "variable" rate card is at least 2.0% less. **It is usually fairly easy to negotiate a waiver of the annual membership fee for the first year. However, if you do not pay at least $30 in finance charges during the year, the bank will most likely require a membership fee when the account is renewed. 15 (return to text) How greedy can the corporate barons of the Credit Card Nation get you ask? Well, after reaching their limit on the profits from finance charges, That is, the "spread" or the difference between what banks pay for money (saving deposits, CDs, Federal Reserve) and what they loan it to us through credit cards is at a historical high! They are reducing their costs by reducing membership "enhancements," replacing human employees with computer-aided technologies, and raising the penalties for over-limit and late fees. This is accomplished in two ways: [1] increasing the penalty fees (from an average of $12.57 in 1994 to $24.02 in 1998 per account "infraction") and [2] reducing the grace period for arrival of monthly payments (from as high as 14 days to as little as zero!). The result is an astounding increase in the corporate treasuries of the credit card companies. Between 1994 and 1998, interest income on credit card debts rose from $34.8 billion to $58.1 billion or 67.0% whereas penalty fee income rose from $7.3 billion to $18.9 billion or 159.0%. See "Fee Revenues (7/9/99)" CARDTRAK ONLINE, CardData (www.carddata.com). 16 (return to text) --- 17 (return to text) Table 3, The BAD: Dastardly Deals for Debtors Credit Card Company Annual Interest Rate* Annual Fee** Membership Enhancements Toll Free Telephone Associates National Bank Delaware MasterCard 19.8% (variable) $0 7, 9 (800) 636-7070 Capital One MasterCard 19.8% (fixed) $0 1, 3, 4, 6, 9 (800) 955-7070 Chevy Chase Visa (First USA) 26.7% (fixed) $12 1, 3, 4, 6, 9 (800) 937-5000 1st Financial Bank South Dakota Visa 19.5% (variable) $20 Not Reported (800) 733-1732 First National Bank Omaha Visa 20.9% (variable) $0 Not Reported (800) 688-7070 First National Bank South Dakota Visa 19.9% (variable) $0 10 (402)*** 636-6055 Household Bank Savings Bank MasterCard 19.99% (variable) $0 10 (800) 477-6000 US Bank NA Visa 19.4% (variable) $12 Not Reported (612)*** 973-2077 United National Bank Visa, MasterCard 19.8% (fixed) $40 4, 10 (732)*** 448-4075 Wells Fargo Bank Visa 19.3% (variable) $18 10 (800) 642-4720 *In general, a "fixed" rate card is preferred unless the annual percentage interest rate (APR) of a "variable" rate card is at least 2.0% less. Many of the credit card companies are systematically raising the interest on accounts with high balances to 22.8% (APR) and as high as 26.% (APR). **It is usually fairly easy to negotiate a waiver of the annual membership fee for the first year. However, if you do not pay at least $30 in finance charges during the year, the bank will most likely require a membership fee when the account is renewed. Also, these banks tend to have the highest penalty fees for late payments and over-limit charges--as much as $29! 18 (return to text) Examples from the Debt Zapper Calculator: CREDIT CARD PAYOFF SCHEDULE: By Interest Rate and Minimum Monthly Payment* (Number of Months to Pay Off $1500 debt) Annual Interest Rate Monthly Payment 10.8% 13.8% 16.8% 19.8% 22.8% $25 87 months 102 months 132 months 282 months INFINITE $30 67 months 75 months 87 months 106.5 months 159 months $50 35 months 37 months 39 months 42 months 45 months ______________________________________________________________ *Assumes no late fees or new purchases. 19 (return to text) Table 4 The [Not too] UGLY: Decent Deals for Debtors Credit Card Company Annual Interest Rate* Annual Fee** Membership Enhancements Toll Free Telephone AFBA Industrial Bank Visa 12.65% (variable) $0 2, 4, 5, 6, 9, 10 (800) 277-0444 Amalgamated Bank Chicago MasterCard 12.25% (variable) $0 2, 3, 4, 5, 6, 10 (800) 365-6464 Associated Card Service Bank Visa 16.65% (variable) $0 4, 5, 6, 9, 10 (800) 472-7708 Jefferson Bank Visa 15.65 $25 1, 2, 3, 4, 5, 6, 8 (800) 768-9668 First Commonwealth Bank MasterCard 11.99% (variable) $0 2, 3, 4, 6 (800) 711-2265 First National Trust Bank Visa 15.75% (variable) $35 2, 3, 4, 6 (800) 326-9387 Providan National Bank Visa 15.9% (variable) $0 2, 3, 4, 6, 8, 10 (800) 227-6886 Republic National Bank NY Visa 15.65 $0 3, 6, 9 (800) 745-2265 Savings and Trust Bank Visa 11.25 (variable) $15 4, 10 (800) 325-2265 United Security Bank Visa 12.96% (fixed) $0 2, 3, 4, 10 (509)*** 467-9084 *In general, a "fixed" rate card is preferred unless the annual percentage interest rate (APR) of a "variable" rate card is at least 2.0% less. **It is is usually fairly easy to negotiate a waiver of the annual membership fee for the first year. However, if you do not pay at least $30 in finance charges during the year, the bank will most likely require a membership fee when the account is renewed. ***This telephone number requires a long-distance charge. No toll free number is presently available. 20 (return to text) This mistake will not only be compounded at over 20% (APR) but could also seriously damage your personal credit history. Other social consequences of escalating credit card debt include heightened anxiety, declining grades (due to more time spent on paid employment), loss of financial aid/ scholarships, academic dismissal, bankruptcy, and even rejection for jobs by potential employers 21 (return to text) To schedule a free session with Debt Counselors of America (DCA), call (800) 680.3328 or visit their web site www.dca.org. We also recommend The National Foundation for Consumer Credit (NFCC). They can be contacted at (800) 388.2227 and their internet address is www.nfcc.org. Good Luck! 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