INVESTMENT OUTLOOK: HOW TO GET AHEAD : LOOKING AHEAD : THE NEW CHARGE OF CREDIT CARDS : Consumers Re-Evaluate Paying Interest to Department Stores as the Lid on Rates Comes Off

Karen Brennan’s financial planning for 1989 will require a pair of scissors.

She’s going to chop up her charge cards for May Co., the Broadway and J. C. Penney.

The reason? Under a state law effective Jan. 1, California retailers can charge any amount of interest they want on store-issued credit cards and on installment sales.

Currently, the stores may charge a maximum of 18% on the first $1,000 they are owed and 12% on the amount after that. After Jan. 1, though, major retailers say they will go to rates as high as 19.8% on all new debt.

“I certainly don’t want to pay more than 18% interest, and I don’t want to be tempted,” said Brennan, a Capistrano Beach real estate broker.

She will also instruct her 19-year-old daughter, Jenny, to stay away from department store charge accounts “because the temptation to buy clothes on one of those store cards is too great.”

The change that has Brennan so concerned should be an important consideration for any consumer who uses credit for such purchases as clothing, furniture and electronics products.

Here are some basic points:

* As of Jan. 1, the sky is the limit on how much interest department stores, gasoline companies and other merchants can charge for installment sales and for credit card balances. There is no usury ceiling, although for competitive reasons retailers generally aren’t expected to charge more than 20% when the interest rate limits are eliminated. If a new interest rate is going into effect on Jan. 1, installment contract and card holders should have been notified by Dec. 1. (Interest rate ceilings were lifted years ago for bank cards such as Visa and Mastercard.)

Retailers that have announced higher rates include J. C. Penney, May Co., I. Magnin and Macy’s--all of which will boost credit card charges to 19.8%--and Sears, Roebuck & Co., which is hiking its rate to 19.2%. Among major retailers, only Mervyn’s has said it will stand firm at 18%.

* For items bought after Jan. 1, some stores may no longer charge a lower interest rate for the portion of a debt exceeding $1,000. For example, if you kept an average balance of $2,000 on a store card this year, you paid a maximum of 18% interest on the first $1,000 and 12% on the next $1,000. Starting next year, if you keep an average balance of $2,000 with a department store, all of it can be subject to one interest rate. If the new interest rate is, say, 20%, you would pay about $400 in interest next year, up from a maximum of $300 this year.

- Some stores--including most of the major department stores--will have a two-tiered system, applying the old interest rates to purchases made before Jan. 1. But it is wise to check, since this is discretionary and some stores could apply the new, higher rate to the entire balance after Jan. 1.

Opponents of the California law change fear that unscrupulous retailers, particularly in minority communities, will take advantage of the removal of the ceilings and charge outrageous rates.

“There is certainly that possibility,” concedes Donald G. Livingston, a consultant to Carter Hawley Hale Stores who was instrumental in getting the interest rate ceilings lifted. “But if people get greedy, we’ll look into that and the Legislature can look into that.”

In addition, the California Legislative Analyst’s Office will review the effects of the law change in three years.

Kevin Brett, press secretary to Gov. George Deukmejian, said the governor signed the law change because he liked the deregulation concept.

“The governor believes the retailer should face the same competitive interest rates (on charge cards) that bank cards face,” Brett said. “This allows consumers to shop around.”

Since bank cards were deregulated in 1980, some institutions have offered them at comparatively low interest rates, providing savings to customers who meet strict qualifications.

Installment sales contracts are a different matter since most people, including low-income customers, usually have little trouble qualifying and often use them for big-ticket items such as furniture.

The potential for abuse led state Atty. Gen. John Van de Kamp to oppose the interest rate deregulation.

“Removing the present ceiling would inevitably result in disproportionately higher rates for low-income purchasers who can least afford it,” wrote Allen Sumner, senior assistant attorney general, in opposition to the legislation.

Carol Evans of the Consumers Union of San Francisco said the lifting of the ceilings was probably most troublesome for low-income consumers, but she also argued that “middle-class consumers have no bargaining power under this change. The retailers can charge whatever interest they want. They are in the catbird seat.”

No one expects sudden, drastic increases in the store card interest rates because competition for business is so fierce among the major retailers.

Evans points out, however, that the stores can greatly increase the rates if they want to. They need only give a month’s notice to the customer. The customer can then pay off the balance he owes or face the much higher rate.

Charles McKinney, a corporate attorney for Sears, Roebuck & Co., said in an interview that even with the lifting of the ceilings, one thing will not change with many of the department stores. They will continue to allow a grace period--if you pay off the entire balance at first billing, you are charged no interest at all.

“In effect you are getting 30 to 50 days for nothing if you use the card that way,” said McKinney. “My sense is that more and more people will do that.”

But Evans had her own advice for consumers facing the new law on department store cards: “Simply pay cash.”

If you can’t, she recommended using bank cards with low interest rates since some of the major department stores accept such cards.

A new survey by Consumer Action of San Francisco found that there are bank cards available in California with interest rates as low as 13.75%. But before you start offering your bank card at department stores, make sure you’re actually saving over what you would pay using store cards.

Remember that many bank cards have an annual fee--usually around $20--and department store cards do not. Also, most bank cards charge late fees if you miss a payment while department stores generally do not.

And remember, too, that some bank cards do not have a grace period. Even if you pay off the balance at first billing, some bank cards still charge you interest, unlike department store cards.

“What this change in the law means,” one expert said, “is that you should sit down and look very carefully at how you use store cards and bank cards. Figure out the costs of each before you use them.”