Advice for the credit-wise consumer

Recession blues got you down?

And, wouldn’t you know it, just in time for the holidays.

But short of boycotting the malls, there’s a lot you can do—both in your personal life and in dealing with consumer issues—that can take the sting out of the year’s busiest shopping season.

First, do some planning.

If your holiday season includes buying gifts and hosting a party or two, figure out what you can afford, what it will all cost—and whether you need to borrow to pay for it (as in, exercising your plastic).

The fact is many folks end up paying for holiday spending for the entire next year.

If you can’t honestly say you’re just going to sit this season out, take time to budget and write out what you plan to do and buy. Even if you break a few promises along the way, at least some semblance of a plan is better than never giving it a thought.

This year, as many are cutting back in all sorts of ways, holiday shoppers will be drawn in by retailers offering deep discounts very early in the holiday season and offering loyal customers discount cards to entice them.

Sure, using your store credit card might get you an extra 20 percent off. But if you are going to take a few months to pay it off at 23.99 percent interest, what are you saving?

Maybe you’re one of the small minority of people who save for the holidays and pay cash (and won’t celebrate the New Year in the red). My advice: Just make sure that you keep some cash in reserve for unexpected costs that come up in January. That way, you won’t turn around and pull out the credit cards in the New Year.

If, on the other hand, you are going to use new credit or take out a loan, make sure that you really understand how much it will cost. Is the loan offering you a teaser rate or no interest for a few months and then slamming you with lots of finance charges? Read the fine print so that you fully understand the terms and interest rate.

Speaking of credit cards, remember: Yes, you are just a number—a number called the credit score. Certain behavior you exhibit in your use of credit can lower your credit score, even if you always pay your bills on time. You may not want to make a big purchase right now but you may, down the road, and a lower score can cost you money in the long run.

First, hold on tight to your cards and be careful when open a credit card account. I recently received the following questions:

This summer I thought I had lost my credit card. After looking everywhere, I called to cancel the card in case I had dropped it and someone might try to use it. Later, I learned from a monthly credit watch service I use that the loss of the card was reported on my credit report. It was almost as if reporting the lost card, which I thought was the responsible thing to do, was really not good for my credit rating. What is the right thing to do?

You were right to report the card and it was the responsible thing to do. But a lost credit card will show up on your credit report as a canceled card for two years from the date of cancellation, if you were paying the monthly payments on time, and up to seven years if you had defaulted on the payments in the past. A credit report is supposed to be a complete picture of how you use credit and what kinds of credit you have. So if you cancel a card, it will be reported, because cancelling a card is part of the overall picture of you.

I have just gotten my first job and my father has always told me not to use credit cards. But I like to have the extra credit available. So I open a credit card that offers a 0 percent interest rate for a certain period of time, use the card, and pay off as much as I can before the 0 percent time is up. Then, if I have a balance, I apply it to another card that gives me the same kind of offer, and close the old card. Is this a good strategy?

Not a good idea. There are several issues here. First, opening a new credit card immediately lowers your credit score in the short term. So every time you open a credit card, you lower your score.
Second, the fact that you are not paying off the balance means that as you go from card to card, you may be accumulating more and more debt.

Finally, closing accounts also hurts your credit score because it shrinks the amount of credit available to you and makes your debt ratio look bigger to your overall credit picture.

The bottom line: going from card to card is not a good idea, whether you are opening a major card—such as Visa, MasterCard, American Express—or opening high-interest store credit cards. So I recommend that if you want to use credit cards, keep the number of cards to a minimum, research which one will work best for you in terms of interest rates, rewards offered to cardholders, and just keep it simple.

Here’s one about Internet loans:

My credit is not very good and I am never approved for credit when I apply for it. This holiday season I plan to apply for a short-term loan on line that will take the payments right out of my checking account. What do you think?

I urge you not to take out loans over the internet because it allows loan providers access to your bank account. In general, the type of loan you are speaking of is called a “payday loan.” Payday loans are short-term loans with very high interest rates (between 300 percent and 1200 percent!).

You do not realize the interest is that high because the fee on one loan does not seem that high. But many borrowers roll the loan over a few times. When you add up all the fees charged with each new loan, the interest charged in the form of the fee is tremendous.

Even a credit card offered to someone with bad credit is usually not more than 30 percent. In Maryland, credit laws have eliminated payday lending through businesses located in the state. But lots of people fall victim to internet offers. Don’t be one of them.

Instead, save what you can, look for bargains, cut back, or think about waiting to give your holiday gifts in the New Year. If it is the thought that counts, then giving should not have a deadline.

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Louise M. Carwell is a senior attorney with Maryland Legal Aid in Baltimore, where she has practiced consumer law for more than 20 years. Carwell, a graduate of the Case Western Reserve University School of Law in Cleveland, Ohio, specializes in credit, foreclosure prevention, consumer protection, and bankruptcy. She regularly trains lawyers and paralegals at Legal Aid and speaks to community groups and judges on consumer issues. In addition, Carwell teaches at the University of Baltimore School of Law and the University of Maryland University College.

This column is for general informational purposes only. If you need help, call your local bar association for a referral. Low-income people may qualify for free legal help in some civil cases from Maryland Legal Aid.

Are you a credit-wise consumer with a question? Send it to Louise Carwell, c/o Exhibit A, wayne.countryman [at] exhibitAnews.com.