How to Cut Through the Plastic Jungle : Finances: Savvy consumers can slash interest rates, lop off annual fees and bargain for better perks.
Plastic is a lot more flexible than you might think. Plastic money, that is.
Americans cope with an estimated 80 million postal solicitations each year for “New! Improved!” credit cards issued by banks and other financial institutions on behalf of three dominant U.S. card associations: Visa International Inc., MasterCard International Inc. and Dean Witter Discover & Co.
With competition so fierce, savvy consumers can slash interest rates, lop off annual fees and bargain for better perks.
One phone call to Citibank Visa, for example, garnered an offer to transform a standard card into a gold card, double its credit limit to $5,000 and halve its annual interest rate on unpaid balances to 9.9%--about a $200 savings on an average $1,700 annual balance.
Citibank doesn’t advertise the lower rate, which is valid for a year and applies only to new purchases and balance transfers. Ask, though, and you’ll probably receive.
“Consumers have negotiating power like they’ve never had before,” said Ruth Susswein, president of the Bankcard Holders of America consumer lobby group. “The only way to get a new, good customer these days is to steal one from your competitor.”
And steal they will. A total of 6,000 banks and other institutions licensed by the Federal Reserve to issue cards now push a multiplicity of perks that include frequent-flier miles, new car rebates and long-distance calling discounts. Stung by a competitive explosion that’s helped boost dollar volume of credit charges by close to 25% for each of the past three years, issuers are doing all they can to grab--and keep--customers.
Just ask Harold Calvert, the 70-year-old Marine veteran who correctly figured his Brittany spaniel named Ginger wouldn’t have much trouble joining 100 million U.S. members of the charge-it generation. She had used up $64 of her Gold MasterCard’s $10,000 credit line to buy dog food when the bank called to ask if Calvert owned a dog named Ginger.
“I said, ‘Yes, do you want to speak to her?’ ” said Calvert, who paid the bill but retired Ginger’s Gold Card. “Every week, I get at least two applications in the mail,” said the resident of a small town near Albany, N.Y. “If you sneeze, you get one.”
Cardholders stuff an average of four cards into their wallets, charging about $70 for each transaction. While fewer than 500 supermarkets around the U.S. accepted such a form of payment five years ago, about 18,000 now generate yearly billings of almost $4 billion.
“Credit cards aren’t really competing with each other,” said Steve Apesos, a MasterCard spokesman. “People are using them instead of cash or checks.”
That may be so. After all, federal law shields purchasers from having to pay for unsatisfactory goods under certain conditions. Price protection is “a reason to choose one card over someone else’s” said Edgar Dworsky, director of consumer education for the state of Massachusetts.
“I’m a bargain hunter,” Dworsky said. “Last week, I bought some luggage, and it’s 10% off now, so I submitted a claim. It was only six bucks, but I’d rather have six bucks in my pocket.”
Only in recent years have companies outside the banking industry awakened to the profits of the credit card, which consumers can pay 20% interest to use and merchants pay as much as 3% of purchase prices to accept. AT&T; Corp., supermarket chain Kroger Corp. and many others have created “co-branded” cards, splitting proceeds with issuing banks.
While an increasingly crowded credit card marketplace has nudged average interest rates down to 17.73% today from 21% a few years ago, a 14% spread between interest and borrowing rates is “a good margin by anyone’s standard,” Susswein said.
Credit card companies have to charge high rates, they say, to cover transaction costs and act as insurance against defaults. “It’s an unsecured loan,” said Apesos at MasterCard. “Imagine what it would be like to go to the bank every time you wanted a $250 London Fog overcoat.”
It still pays to be careful, though. Dworsky’s office recently put together a list of some of the practices credit card companies use to squeeze as much as possible out of every transaction. Some banks start charging interest from the purchase date, for example, even before they pay the merchant. Others won’t honor a monthlong grace period for new interest charges unless the entire bill is paid off each month.
That practice led American Express Corp. last fall to create its Optima True Grace card, which offers consumers a 25-day period after the close of the monthly billing cycle before charging interest on new purchases.
The original American Express card is termed a “charge card” by the industry, because each month’s balance must be paid in full. Credit cards require just a minimum payment each month, while charging interest on the total amount owed.
Cards that ask for low minimums of 2% to 3% can end up costing more by tempting users to accrue larger balances that accumulate more interest charges. Such “teaser rates” usually apply only to new purchases and for a limited time.
In fact, credit card companies count on rate increases. One industry publication even advised issuers on the best ways to soften the blow. “Those cardholders whose rates adjust monthly don’t have as great a shock as those getting hit with sharp quarterly increases,” said Credit Card Management magazine.
