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Christmas Tip For Consumers: Stay Out Of The Red

By Marilyn Geewax

Published December 5, 2009 2:41 PM

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In December, many people put red and green together to make their homes look more festive. But financial advisers say that when heading to the mall, shoppers would be wise to stick with the green — and stay out of the red.

Consumers who use cash in December are more likely to avoid debts, fees and interest payments in January.

Such warnings may not be having much of an impact, according to Michele Raneri, an analyst with Experian Information Solutions Inc., a firm that studies credit card use. Raneri said consumers have been piling more debt on their department store credit cards throughout the recession.

Overall, the total amount of credit card debt is down about 8 percent. But the total is lower only because card issuers have shut down so many risky accounts, or consumers themselves have cut up cards. "Lenders are tightening up, and consumers are closing accounts," she said. "And fewer new accounts are being opened."

As a result, credit card accounts are down 18 percent, which makes debt appear to be declining, she said.

But for the individuals who still have open credit accounts with retailers, debt is actually growing. The most recent reports show the average balance per consumer on a single department store credit card is $198. That's up about 17 percent from last year, she said.

Raneri said the data suggest many people are using their store cards more because they don't have a lot of room on their bank cards for additional debt. For example, they may use a department store credit card to buy Christmas presents, and then switch to a general-purpose bank credit card to pay for lunch. That strategy helps spread debt around to avoid hitting credit limits.

People who want to open or close credit accounts should be careful about how they do it, she said. "If you open a lot of cards, you look credit-needy," she said. "But you don't want to close a lot of cards suddenly, either" — because that could trigger warnings that the cardholder has become financially strapped.

Either way, consumers risk damaging their ability to get credit if they need it. "Slowly make changes — any drastic changes could affect your credit rating," she said.

View Transcript

LIANE HANSEN, host:

During the month of December, we deck our halls and don apparel in the festive colors of red and green. But when it comes to holiday shopping, financial advisers say: If you're smart, you'll stick with the green and stay out of the red. Here to discuss the dangers of December debt and the January hangover is NPR senior business editor Marilyn Geewax. Welcome back.

MARILYN GEEWAX: Good morning, Liane.

HANSEN: We're right in the heart of gift-buying season right now. How are consumers paying for their purchases?

GEEWAX: Liane, with the economy in the kind of bad shape that it's still in, you'd think that people would be avoiding their credit cards. But, in fact, we're seeing individuals pile up more debt, especially on their department store credit cards.

Now, from the credit card industry's perspective, total debt actually is down a little bit, but that's because stores and banks themselves have closed so many of those accounts, especially on their weakest customers, and a lot of people have closed the accounts themselves. So, all together we're down about 18 percent on our cards.

But for the individuals who still have them open, those debts are actually higher. The average balance per consumer on a single store credit card is about $198 now, and that's $30 more than it would've been last year at the same time.

HANSEN: How well are people handling their debts to these store credit cards, these retailers?

GEEWAX: We know that they're not handling it all that well, because you can see the percentage of people paying late payments to the stores has actually risen significantly in the past year. So, we know people are getting hit with more fees and they're paying higher interest rates.

HANSEN: Why open department store credit cards in the first place? I mean, can't all these purchases be charged to a bank credit card?

GEEWAX: You know, it's true. You could just use that general purpose MasterCard and Visa card any time you go into a Nordstrom's or a Lord and Taylor's. But we get lured into these store credit cards because they offer us discounts and reward points.

But I was talking with Michele Raneri, who's an analyst with Experian - that's a firm that studies credit card use. She said people are using their department store credit cards more this year not just because of those discounts, but because they don't have room for more debt on their bank cards. So, they end up using a Macy's card to buy the Christmas present and then they buy lunch with their bank credit card. And that helps spread your debt around so you don't hit the credit limit.

HANSEN: But is that really a sensible strategy?

GEEWAX: It's certainly attempting one. Anybody can understand at this time of year you want to shop. And the trouble comes in when it gets to be January and you've got bills piling up, you've got fees, interest payments. It really is a lot more financially sensible to stick to cash in December. Of course, now, the retailers are hoping that we will use a lot of plastic because they would like an exuberant shopping season. And certainly it's true.

In the short term, a lot of buying right now would make the economy look healthier, but financial planners say that it's just kind of crazy to pick on more debt when the job market is still so dicey. To have a sustainable economic recovery over time, it's really better to be more conservative.

HANSEN: Reduce the personal debt and boost up our savings. All right, but, Marilyn, if someone wants to kick the debt habit, is it advisable to close all credit accounts except for one bank credit card?

GEEWAX: It's strange. You would think that if you closed all your credit cards, that would show that you're really making a commitment to financial responsibility. But, actually, the financial planners say it's the opposite. If you make any sudden moves where you either open a lot of accounts or you close a lot of accounts, it makes you sort of look suspicious for some reason.

So, the better strategy is if you want to start closing those credit cards, just do it slowly and over time.

HANSEN: Marilyn Geewax is NPR's senior business editor. Thank you, Marilyn.

GEEWAX: You're welcome, Liane. Transcript provided by NPR, Copyright National Public Radio.

Source: NPR

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