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Options abound for credit card rate reduction

00:00 EST Thursday, January 17, 2002

There are several good options for people who are annoyed by high credit card interest rates. None of them involve the use of scissors.

Visa and MasterCard rates at major financial institutions now average around 18.5 per cent for standard cards. Yesterday John McCallum, former chief economist at Royal Bank of Canada and the new Secretary of State for International Financial Institutions, called the rates "grotesquely high" and pledged to look into the matter.

While you're waiting for the royal commission of inquiry, you can cut up your credit cards if you choose, but why? For savvy consumers, a credit card is the financial equivalent of a Swiss Army knife.

An easy way to get these rates down to the 10- to 14-per-cent range is to switch to a low-rate credit card.

These cards don't typically offer airline points or any other rewards, and they also charge an annual fee of roughly $25 to $30. But if you always seem to be carrying a big balance on your card, these low-rate products could save you hundreds of dollars in interest charges over the course of a year.

A temporary solution to high card rates is to watch out for a promotion run by some cards where you'll get a low rate for a few months if you transfer a balance on a card you already own. Some cards have also offered temporary zero-per-cent rates for new customers.

Credit cards are best thought of as a way to pay for things, and not as a way to borrow. If you have to borrow to buy something -- and who doesn't at some point -- then there are some excellent card alternatives.

Probably the cheapest way to carry a debt is to use a secured line of credit, where the bank holds your home or other property as collateral. Fees are likely to apply when you set up this kind of credit line, but you'll make up for them with interest rates as low as 3.75 per cent.

Unsecured credit lines cost nothing to set up, and the rates available are still vastly cheaper than credit cards. Expect to pay something like 4.25 to 7.25 per cent.

Banks aggressively market unsecured credit lines, sometimes by sending promotions in the mail in which creditworthy clients are preapproved for this product. If you receive one of these promotions, take advantage and let your credit line sit there until you need it.

One of the best things about credit lines is how flexible they are. You can write cheques from them, and transfer money between them and your everyday chequing or savings accounts. Some banks offer a feature that allows you to automatically pay your monthly credit card bill from your line of credit.

Still another option for paying off a card balance is a consumer loan, in which the rates are slightly higher than with credit lines.

The reason rates for loans and lines of credit are so low is that, unlike credit cards, they have followed the trend of declining interest rates over the past year or so. Be aware that if rates start to move up as the economy firms, loans and credit lines will cost proportionately more.

If you want to compare credit card rates at major financial institutions, check the MoneySense.ca (http://www.moneysense.ca) or Webfin.com (http://www.webfin.com) Web sites. Industry Canada's Consumer Connection Web site (consumerconnection.ic.gc.ca) offers an on-line calculator that provides an interest rate comparison based on your usage patterns.

The calculator shows that someone who carries an average monthly card balance of $2,000 would pay a high of $399.80 in annual charges with the American Express standard card and its 19.99-per-cent rate, and a low of $210 with TD Canada Trust's Emerald card and a low-interest MasterCard from Niagara Credit Union.

Bear in mind that comparisons like these don't factor in the value of credit card loyalty programs such as airline frequent-flier points and travel insurance. It's typical for the cards with the best rewards to carry rates at the high end of the spectrum. The big banks themselves report that about half of their card clients have found the ideal solution to high card rates. These are the people who pay off their balance at the end of every month.
rcarrick@globeandmail.ca
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The growing credit gap

The prime rate is at its lowest level ever, but credit card rates are still sky-high. A sample of current credit card rates shows a whopping 25-percentage-point spread.

PRIME RATE                                3.75


Laurentian Bank (Black Low Rate card)    10.5


CIBC Visa (Aerogold)                     19.5


Sears                                    28.8

Source: Companies




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