Fixed-Rate Cards Going Extinct


Sad news: Fixed-rate credit cards have been put on the endangered-species list.

To reduce risk of loss, card issues such as Bank of America (Stock Quote: BAC) and J.P. Morgan Chase (Stock Quote: JPM) are cutting back use of cards carrying fixed interest rates in favor of ones carrying floating rates. With your rate constantly shifting according to market conditions, or according to the issuer’s view of your potential for falling behind on payments, it will be harder to figure how much you’ll have to pay each month.

Unless, of course, you follow the long-established guidelines for smart credit card use.

The cardinal rule is simple. If you don’t carry a balance, it doesn’t matter whether the card rate is fixed or floating. In fact, it doesn’t even matter whether the rate is high or low, because if you don’t carry a balance you don’t pay interest.

Credit cards are best used as a convenience, not to borrow money.

To avoid interest charges and other fees, keep on top of things like the due date for your next payment. You don’t need to wait for the next statement to discover the date, since most card issuers provide that kind of information to customers who track their accounts online. In fact, many issuers, such as Wachovia (Stock Quote: WFC), offer free email services to alert the customer to payment deadlines or warn when one is getting close to the balance limit.

Many people, of course, do carry balances, especially after the big-spending periods like the holidays or summer vacation season. If you have one, or are unhappy about a card that is shifting to a floating rate, pick a strategy:

Look for another card. There still are fixed-rate cards out there. Use the shopping tool to start your search. You can use a card’s balance-transfer service to move your debt from the old card to the new.

Keep in mind that jumping from card to card too often can weaken your credit score, since it makes you look too eager to rack up debt. Also watch out for balance transfer fees.

Look to home equity. A home equity loan can be a good source of money to pay down high-interest card debt, since equity loans usually carry lower rates. Home equity installment loans currently charge about 8 percent, according to the survey, and home equity lines of credit, or HELOCs start below 3.5 percent. HELOCs carry variable rates but usually at levels far lower than credit card rates.

Use the search tool to find a good HELOC. Remember to pay off any HELOC loan as fast as possible to minimize those interest charges.

Pay debts faster. With a little budget trimming you can raise some extra cash to pay your balance off sooner. Use the Credit Card Payoff Calculator and Accelerated Debt Payoff Calculator to devise a strategy. If you have debts on more than one card, put your extra payments into the cards with the highest rates. Paying off a card charging 15 percent is like earning 15 percent in a savings account.

Use a debit card. Instead of a credit card, use a debit card for most purchases. Debit cards draw from your checking account and do not charge interest. Just be careful to avoid spending more than you have in your account, as overdraft fees can be steep.

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