Debt Management: Will your credit card zap you?

July 6, 2007

Choosing the wrong ones can drive up your borrowing costs. Here's what to watch out for.

Key Points

If you're like most consumers, you get your fair share of offers for credit cards-often at tantalizingly low interest rates, with generous spending limits and cash-advance privileges.

These deals can seem mighty tempting, for they imply that you don't have to put off buying that high-def TV or Rolex watch. Instead, you can purchase it right now. At the same time, since many credit cards promise discounts, rebates, or other extras, the more cards you carry, the more benefits you stand to reap-or so it may seem.

But are the deals really that good? And is it wise to say Yes to every seductive offer that appears in your mailbox? Let's take a look.

What grabs your eye first when you get a credit card offer? The promise of cash rebates? The chance to accumulate airline frequent-flier miles? For many people, it's a low interest rate. But, as with just about everything these days, cheapest isn't always the best. Even a no-interest card can be a bad deal if the rate shoots up after a short introductory period. A typical variable-rate card charges about 14.5 percent these days, so you could eventually be staring at a rate that represents quite a jump from paying little or nothing in interest at the outset.

Before you apply for any credit card, make sure you get answers to the following key questions:

If you use your card for purchases and cash advances, the credit card company has another surprise for you: You'll likely be paying two different rates, and all of your payments could go to the lower of the two. Suppose you charge some purchases at 15 percent, and then take out a cash advance at 22 percent. The card issuer might not let you start paying down the more expensive loan until you've discharged the cheaper one.

Those blank "convenience" checks you receive with your credit card statement can be fraught with problems, too. For one, the teaser rates on them may entice you to use them to pay off some of your other debts-auto loans, for example. But if the checks come with teaser rates valid for a limited time, you may save money by switching, but only for a brief interval. If you can't pay off the credit debt before the clock runs out, you could be paying the balance at a higher rate than you otherwise would have been charged on the original loan.

If you're not sure whether a particular credit card offer is right for you, read the fine print or call the issuer. Examine the terms of your current cards, too, and don't be afraid to threaten to take your business elsewhere-there are plenty of other offers out there. The credit card companies are aware of this, and will do everything they can to avoid having you transfer your balance to a rival's card.