Cash, credit or debit?
That seems to be the question these days as shoppers crowd local stores looking for holiday bargains or buying presents from their children's wish lists.
And more and more, people are staying away from credit cards and moving toward cash or debit/ATM cards as a way to control costs and avoid costly fees and higher interest rates.
"I know if I use my charge card I'll be in deep trouble," said Jeannette Osgood of Methuen, as she wandered the aisles of the Thunder Sports shop in North Andover on Friday. "I'll use them if there's a promo, or a discount. But you're able to budget better if you use a debit card."
As the holiday shopping season goes into full swing, many area retailers are reporting a drop in credit card use and a rise in the use of cash and debit cards. The reason, according to national surveys and consumer groups, is that people are being hit with higher interest rates on their credit cards while they are still gun-shy about overspending in a recessionary economy.
In downtown Andover, some stores report people are buying items with a combination of cash and credit cards, so that the credit card bill isn't as high, and so their spouses don't get as mad when they see the bill.
"More people are paying with both," said Honey Burke, manager of Irresistibles, located at 15 Barnard St., Andover. Burke said the store, actually part of a chain of 13 outlets that sell high-end clothing, jewelry and accessories, still sees credit card use, but that some customers try to reduce the impact of their purchases by splitting the bill and only charging half to the credit card and paying the other half with cash.
At nearby Izzy's Emporium, owner Leigh Heffron said she saw the same thing about three or four months ago, but that recently, she is seeing a new phenomenon.
"People want to spend again," she said. "Everyone's tired of being tight. They're putting purchases on credit cards and saying, 'I'll just get it and worry about it later.'"
The folks who do that may want to tread carefully, however, as more and more banks, like CitiBank, Wells Fargo and Chase, which back credit card servicers like Visa and MasterCard, are increasing their rates.
The advice from bankers and consumer groups alike is: Open your mail and read the fine print. In many cases, consumers are being warned about credit card rate increases, but instead of poring over the confusing legal jargon, they discard these important announcements, thinking of them as nothing more than junk mail.
"In December, we are sending notices to 40 million credit card customers explaining what their rate is and why it will or won't change," said Anne Pace, a spokeswoman for Bank of America. "It's a one-page cheat sheet. There shouldn't be any surprises."
The move to simpler communication of credit card rates and fees was prompted by years of confusion and now shock as credit card customers have seen their rates double and triple in some cases, seemingly without warning.
Earlier this year, President Barack Obama signed legislation that tightens the reins on runaway credit card companies, forcing them to become more consumer-friendly and limiting the kinds of abuses that have been rampant in the past.
In a highly competitive industry, credit card companies are already changing their approach, and some, like Bank of America, have put a hold on any rate increases until after the new legislation goes into effect in February 2010.
"We are not increasing rates on consumer cards prior to February unless the account has been late on two or more occasions in a 12-month period," Pace said.
Peter Garuccio, a spokesman for the American Bankers Association, said there is a little-reported change in the new law that credit card companies are already adhering to: Starting in August, banks have been required to send notices to all their customers prior to any kind of rate increase.
"On Aug. 20, 2009, a key provision took effect that says, if you are going to raise somebody's interest rate for any reason, you have to give them 45 days' notice," Garuccio said. The notice has an "opt-out" clause, so that people can decline the increase and pay off the credit card within a certain period of time at the existing rate.
"We want people to read their mail and pay attention to what they are getting," he said. "If you throw it away, and 45 days go by, you will see an interest rate hike."
He said if a consumer decides against paying the higher rate, the credit card company will close the account and give consumers up to five years to pay off the balance, or double the minimum until the balance is paid off, "whichever is better for the consumer."
While banks and credit card companies are now doing more to communicate such provisions to cardholders, in some cases they are also jacking up rates in advance of the new law going into effect.
"We have seen credit card companies change the terms leading up to the holidays," said Lauren Bowne, a spokeswoman for the Consumers Union, which publishes Consumer Reports magazine. "People's rates are going through the roof."
Not only are rates going up, but some companies are changing the terms of the agreements, she said.
Chase Bank, for example, recently told credit card customers that they had to pay higher monthly minimums from 2 percent of their balance to 4 percent, she said. When consumers called to complain, they were told they could lower it back down to 2 percent if they accepted a doubled interest rate.
Bowne said those kinds of shenanigans will not be allowed under the new law.
"Issuers will no longer be able to coerce customers into accepting rate increases (or other term changes)," she said. "Once the new rules go into effect, consumers will be protected."
That's good news for people like Elizabeth Murphy of North Andover. Shopping along Route 114 recently, she said she won't even shop online this year, because she has to use a credit card and is fearful of the consequences.
"I would rather pay with cash or an ATM card," she said. "I have always had a credit card, but use it for emergencies."
Her fears are well-founded.
Recently, the Consumers Union asked the Federal Reserve Board to step in and stop the unfair credit card practices that have emerged since Congress passed the Credit CARD Act earlier this year.
In a letter submitted to the Federal Reserve Board late last week, Consumers Union is asking the Fed to stop credit card issuers from coercing customers into accepting interest rate hikes that will be illegal under the new regulations.
"Chase Bank has drastically raised minimum payments twice in the past 12 months on many customers with credit cards that had a promotional fixed interest rate for the life of the loan. Many card holders with large balances have been faced with the difficult choice of accepting a 250 percent hike in their minimum payment or a higher interest rate that will soon be prohibited by law."
"In most cases, the Credit CARD Act prohibits card issuers from raising interest rates on existing balance unless the customer has been more than 60 days late."
A call to Chase was not returned.
The Consumers Union is also urging the Fed to prevent card issuers from using "interest-back programs" to raise rates that will be illegal under the new regulations.
According to the group, Citibank has been changing customer contracts to raise rates to as high as 29.9 percent but offering to credit back 10 percent of the interest if customers pay on time. This "interest-back" promotion disguises an interest rate increase that would be prohibited under the Credit CARD Act unless the customer was seriously delinquent, the group said in a press release.
As of last week, the Fed had taken no action on the consumer group's requests.
TIPS FOR CREDIT CARD JUNKIES
Consumers generally need to be more aware of what's going on with their credit card accounts. A new law set to take effect in February 2010 will "level the playing field" between consumers and credit card companies, but only if people pay attention, says Lauren Bowne of the Consumers Union.
Some things to keep in mind:
Credit card companies are now required to give you 45 days' notice before jacking up your interest rate. Open all of your credit card mail and read all the inserts carefully for information about rates and fees.
If you "opt out" of a credit card rate increase, the credit card company will cancel your card while you pay it off. This can hurt your credit score. If you typically have a low balance on the card, you may want to consider keeping it and paying it off every month.
Credit Utilization Ratios are the difference between what you owe and your total credit limit. The larger the gap, the better your credit score. This is another reason to consider keeping a credit card, even with a higher interest rate.
Someone who has a credit card but never uses it may be getting charged a dormancy or inactivity fee. Read the fine print to find out.
This holiday season, keep your credit cards home, and pay down your credit balance as a gift.
Source: Consumers Union; miscellaneous Web sites.
