How to pay off credit card debt

Consumer interest in credit cards begs question of interest rates - includes a related article on how to juggle credit card balances

Americans charge everything from groceries to health care. Savvy borrowers, however, are paying off their balances each month, eliminating finance charges and leaving meager profits for lenders.

Consumers charged more than $1 billion between Thanksgiving and Christmas. But besides the convenience and ever-alluring buy now/pay later possibilities of credit cards many shoppers are using plastic for its perks. Since 1992, credit-card issuers have been offering more and more rebate programs -- some 80 national and 1,400 local ones -- along with other incentives.

The average American charges $3,000 annually Merchants pay 2 percent, or $60, to banks, not much incentive for lenders to issue credit cards. But Americans also run average balances of $2,000 at interest rates of about 17.5 percent, generating $350 per card-holder annually for lenders.

Consumers have grown more reluctant to pay such interest, according to Robert McKinley, president of RAM Research in Frederick, Md. "Credit cards are a very expensive way to borrow, and consumers have opted to use their cards for convenience only," he tells Insight. In the eighties, 71 percent of credit-card users were revolving debt. That number now is 64 percent.

"Bankers in this business tend to view [those without a monthly balance] as freeloaders and deadbeats, and they just as soon they not have their card because in many cases they are losing money," McKinley says. Many credit-card companies either are phasing out programs or are charging low-activity fees or maintenance fees to users who don't hold balances.

Some programs simply have gone out of business, despite earnest experiments with interest rates and annual fees. GM Mastercard resuscitated its program by reducing benefits, as did many of the airlines two years ago with a 20 percent hike in the number of miles needed to cash in on a free ride. GE Capital has added a $25 fee to cardholders who don't pay interest. Giant Food, a Southeast grocery-store chain, kept its incentive program alive by changing lenders. "It's a sign of what's to come," says McKinley

There still are great perks. Gasoline cash rebates are popular. The Gulf card, for example, has no annual fee. Consumers who don't keep a balance and charge $4,000 a year ($800 toward gasoline purchases) will get a $64 rebate.

Other deals aren't so good. Citibank Advantage (American airlines) Miles cardholders charging $2,800 annually and carrying a balance of $1,950, for example, will pay $344 in interest for one year. Combined with the hefty $50 annual fee, these members will earn 2,800 miles at a cost of $394 -- a price higher than the cost of many supersaver tickets. A round trip ticket requires 25,000 dollar-miles within a three-year period.

"You have to balance the cost of the program vs. the rewards you expect to use," says Bob Johnson, senior research associate at Purdue University's Credit Research Center. He suggests choosing perks based on lifestyle -- and remains most enthusiastic about cash rebates, although credit-card companies are turning away from this practice.

"The person who spends a lot in interest, who carries big balances, should avoid these perks and go for low interest rates," says Ruth Susswein, executive director of Bankcard Holders of America, a nonprofit organization based in Salem, Va. "The people who will benefit are the ones who pay in full -- the ones the lenders don't particularly want."

Before applying for a specific card, consumers can get a cost-benefit analysis, as well as a list of perks and rebates for $5 from Bankcard Holders of America at 524 Branch Dr., Salem, VA 24153. RAM's CardTrak (800-344-7714) provides a summary of cards with the best interest rates nationally for $5.

RELATED ARTICLE: Saving Cash by Juggling Cards

Gone are the days when consumers could get both perks and low interest rates on just one card. But savvy consumers still can have their cake and eat it too by juggling credit-card balances. There are a number of ways to do this. The industry has even named these savvy scenarios contrived by creative consumers.

Peter, Paul and Marry. After charging expenses to a rebate card, cardholders can shift an unpaid balance to a low-rate card using a balance-transfer check. "You've got to juggle two accounts," says Robert McKinley, president of RAM Research in Frederick, Md. "To some consumers, that might be more trouble than it's worth. But you get more bang for the buck if you can rob one card to pay the other." That is, robbing Peter to pay Paul and then "marrying" the two cards.

Buying Down. Consumers can buy down points on credit cards as they can with mortgage loans by using a card with a modest annual fee ($15 to $2S) at an interest rate 5 points lower than the lowest-perk card. "If you can shave points off and you have an average $2,000 balance, you're going to save $100 in interest," McKinley says.

Squeaky Wheel. McKinley advises calling the bank and complaining about a high interest rate or fee. If it's not reduced, consumers can credit shop locally at small banks or credit unions.

Run, Skip, Hop. Consumers can jump from one introductory low rate card to another when the teaser rate expires.

"A lot of this stuff, of course, drives the bankers crazy, but turnabout's fair play," McKinley says. "They kind of had a ride on consumers through the eighties. Now they're dealing with enlightened consumers."