- The Washington Times - Monday, January 30, 2006

Flurries of easy credit offers bring avalanche of debt

he stakes are higher this year for consumers who rack up holiday debt. Not only are interest rates on home loans and credit cards rising, but gasoline and heating costs are way up. Many households already are overextended.

Add it up and paying off debt may get a lot harder this year.

“Normally it’s not a major concern,” said Joel Naroff of Naroff Economic Advisors in Holland, Pa., “but the difference this year is that interest rates and energy prices are a lot higher.”

That hasn’t prevented banks and credit-card companies from pitching the usual loans wrapped in “gift” clothing.

Some offered refinancing deals with holiday themes to stretch out mortgage payments. Others encouraged borrowers to skip a loan payment or take on more credit-card debt with a cash advance.

Whatever the case, holiday credit offers rarely benefit consumers and often lead to post-holiday debt hangovers.

“Remember, lenders are in the money-making business, not in the gift-giving business,” said Karen Gross, a consumer finance expert at New York Law School.

Consumer credit in September totaled $2.16 trillion, near a record high, according to the Federal Reserve. The figure does not account for credit-card debt that is consolidated in home-equity loans.

Credit-card debt has nearly doubled since 1995 to more than $9,300 per household , according to CardWeb.com of Frederick, Md.

Among the kinds of offers consumers found in their mailboxes:

Mortgage refinancing

Some mortgage lenders encouraged borrowers to refinance for a lower monthly payment to free up cash for the holidays.

That could make sense for borrowers with adjustable-rate mortgages that might rise soon. By refinancing to a fixed-rate loan, many may still be able to lock in a relatively low rate.

The same is true for homeowners with large credit-card bills that could be consolidated into cheaper, fixed-rate home-equity loans.

“But if you’re trading a lower-rate mortgage for a higher-rate one just to free up cash, you’re in a losing trade,” said Greg McBride, senior analyst with Bankrate.com, which tracks consumer borrowing costs.

Given recent interest rate increases, borrowers would most likely have to refinance to a longer-term loan to lower their monthly payments. That means more money paid to the lender over the life of the loan.

Another way to free up cash would be to borrow against the equity built up in the home, either through a larger mortgage or a home-equity loan.

CitiMortgage mailed advertisements for refinancing deals that provide “not only extra cash every month, but extra spending money for the holidays.” But such options would likely result in larger or higher-rate loans.

The offer was aimed at people who haven’t yet refinanced, and could lower bills for some homeowners, said Citigroup spokesman Mark Rogers.

Skipping payments

Other banks and finance companies advertised holidays-off policies on outstanding loans.

Avoid skipping a payment if at all possible, experts say.

Many lenders pitch these offers around the holidays to encourage borrowers to delay repayment of debt. But interest continues to accrue, and the debt increases. That’s more money for the lender in the long term.

The reverse is also true, which is why many lenders discourage early repayment or even charge penalties for doing so.

Skipped payments on a mortgage or car loan also can trigger default provisions on credit cards. That’s when a credit-card company automatically increases a borrower’s interest rate for missing a payment on a separate loan.

Taking cash advances

What about “free” checks in mail?

Companies such as credit-card giant MBNA mailed packets of blank checks for borrowers to use as cash advances or balance transfers.

The fee for filling out and cashing each loan ranges from $10 to $75, depending on the amount borrowed.

Many credit-card companies mailed holiday “gift checks” for borrowers to sign and cash. Some are blank, others are filled out for specific amounts. Many advertised interest rates under 5 percent. Almost all carry hard-to-understand fees and provisions for many borrowers.

The so-called “application of proceeds” provision, usually buried in fine print, states that a borrower’s payments, including those on new transactions, will apply to loans with the lowest rates first.

That means a borrower with higher-rate debt effectively delays his repayment of that line to pay off the lower-rate check loans. The previous higher-rate debt continues to accrue interest.

Whatever the case, “too many people don’t see that they’re borrowing money that they’ll need to pay back,” said Ms. Gross, the consumer finance expert in New York. “None of this is free.”

• Distributed by Scripps Howard.

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