It’s Time to Refinance Credit Card Debts

A move by the nation’s biggest credit card issuer to sharply cut its rates for its best customers should prompt consumers to start considering “refinancing” their credit card debts.

New York-based Citibank on Thursday announced that it will lower rates on its “Classic” Visa and MasterCard accounts to 15.9% and to 13.9% for its “Preferred” cards. Citibank cardholders previously paid 19.8% interest rates on both kinds of cards.

Even though eligibility for those low rates is limited to Citibank customers with good payment records and substantial charges, industry experts expect the move to spur a flood of rate cuts among other major issuers, such as Bank of America and Chase Manhattan.

Although some smaller banks have been offering comparatively low card rates for years, the entry of big banks into low-rate territory is pivotal to many consumers who may want to refinance these debts. Small banks do not generally offer the liberal credit approval standards and high credit limits necessary for consumers with high balances to refinance, said Robert B. McKinley, publisher of CardTrak, a monthly credit card newsletter published in Frederick, Md.

For example, usury laws in Arkansas keep credit card rates there remarkably low. Arkansas banks now charge 8.5% on outstanding credit card balances. But most out-of-staters shouldn’t waste their time applying, McKinley said. These banks reject the vast majority of applicants and rarely give out a credit limit above $800.

Credit limits at big banks average $1,500, and it is not unusual for consumers to secure a $5,000 limit, he added. Meanwhile, interest charges now range from about 12.5% to 21% among the major credit card issuers.

Of course, even at 12% or 13%, credit card debt is expensive. Credit card rates remain several percentage points higher than rates for home equity loans, for example. And the interest paid on credit cards is not tax deductible. Consumers are wise to pay off credit cards completely.

However, many people are not in a position to pay off their credit cards now or at any time soon. Refinancing may be their best option. And anyone who has a revolving balance on a 21% card clearly could benefit by shifting that balance to a lower-rate card.

Refinancing credit card debt can be as easy as getting a new card that allows the cardholder to get a cash advance. Many big banks send out blank checks with newly issued credit cards in order to facilitate credit card refinances. Consumers send the checks to their current credit card companies to pay off outstanding balances and voila , they have refinanced.

The five seconds it takes to fill out those checks can save consumers hundreds of dollars. A person who is paying 21% on a $2,000 credit card balance, for example, could save $160 in interest charges each year by transferring that balance to a 13% card.

Those who want to refinance should be wary, however. Low-rate bank cards are not all alike. Where some allow virtual “fee-free” refinances, other banks charge such substantial fees that the benefit of refinancing credit card debts can be wiped out.

For example, some banks charge cash advance fees that can be as high as 5% of the amount advanced. For a person refinancing a $2,000 debt, that cash advance fee would cost $100.

Annual fees must also be considered. Where big banks commonly charge between $15 and $30 in annual fees, some bank card fees range as high as $69. Other banks charge no annual fees at all.

Consumers should also consider how the interest rate is calculated. Most banks calculate interest based on the consumer’s average daily balance. But a few subscribe to what’s called the “two-cycle” average balance method. This calculation results in consumers paying higher interest charges when they first start to maintain a balance on their card, McKinley noted.

Finally, card shoppers should consider service. A number of credit card companies offer 24-hour hot lines that can provide consumers with a cash advance or a credit limit increase in emergencies. Frequent travelers and hard-core shoppers should be aware that some credit card companies also offer discounts on travel, rental cars, insurance and a variety of special products.

Those who compile a shopping list of what they want before applying for cards are likely to find the card they want with a minimum of wasted time.