Warning: Credit card trap ahead

Credit cards, while useful, can be dangerous unless you follow these common-sense tips

By: Laura Ramsay

  Credit card companies hate freeloaders. That's the nasty name applied to money-wise people who routinely pay off their credit card balances each month and avoid interest penalties.
  Card companies want you to use your card often, because they collect a fee from merchants for each transaction. They want you to run a balance every month so they can charge interest. But if you get into serious debt with your card, you're on your own.
  That holds true even if your credit problems aren't entirely of your own making. If your best friend borrows your card, runs up a huge balance and skips town, don't expect any sympathy from the card company. You're on the hook for everything your buddy buys with your plastic. In fact, several years ago, says Jody Sperling, she used her personal credit card for business expenses, as she was asked to do by her employer. When her boss defrauded the company and skipped town, she was stuck with several thousand dollars in unpaid credit card bills. She begged the credit company for mercy, but had no suck luck. She was left on her own to pay the entire bill.
  "Never - and I mean never with an underline - let anyone else use your credit card," says Laurie Campbell, program manager at the Credit Counselling Service of Toronto, who has seen it all when it comes to credit cards and financial catastrophe. "You hear every story in the book because of that. A friend borrows the card for one purchase. It turns out to be thousands of dollars. The friend takes off. You're responsible for those purchases because the card was not stolen. And the results are unfortunately staggering."
  Ms. Campbell offers up these other tips and traps for credit card users to be aware of:

• Shop around before signing up with a credit card company. "Look at interest rates, annual fees and incentives to decide what type of credit card is best for you... If you're going to pay it off every month, you don't want one with annual fees. If you are not going to pay it off every month, you want to have the lowest interest rate possible. My advice, however, is to pay it off every month," she says.

• Read card come-ons and your card agreement carefully. Watch out for traps such as extremely low interest rates that rocket higher after only a few months. "There's always a new gimmick to get people to sign up. There are so many companies out there trying to get their credit card product into your pocket and it's becoming increasingly difficult for them to do that, so they're trying new angles all the time - incentives, points, lowering the amount that has to be paid every month," says Ms. Campbell. "Sometimes an introductory rate is only 6%, but it goes up to 18% after only six months. Watch out for those types of things."

• If you're transferring a balance, look for hidden charges. Some companies tack on a fee for moving balances from other cards, usually a percentage of how much you owe. If the fees are high enough, it might not pay to make the switch. But you'll have to read the fine print carefully to find out about it. Also understand that some low-rate offers apply to only the transferred portion of your balance, and payments you make are applied first to the lower-interest part of the balance, leaving the rest of your balance to accumulate interest at a higher rate.

• Restrict yourself to one or two credit cards. "The more credit cards you have, the higher your debt load will be," she says.

• Don't take your credit card to the mall without knowing exactly what you're going to buy with it. "Up to 90% of purchases on credit cards are impulse purchases," Ms. Campbell says.

• Pay your credit card in full every month. If you can't, put the card away until the balance is paid off.

• Use your credit card for convenience, emergency and safety situations, not for necessities.

• If you're getting married, keep a credit card in your own name. "Fifty percent of marriages end of divorce... You want to create your own credit report," Ms. Campbell says. And if your spouse gets into credit card trouble, it's not your problem because it's not your card.

• Be aware of the following signs, which indicate your credit card use is leading to financial trouble: not being able to pay your balance off every month; borrowing from one card to pay another; owing more and more money every month; receiving calls from collection agencies, and/or having your card cut off by the company because you're over your credit limit.

• Taking out a consolidation loan can be a good way to pay off a credit card debt. But first, "make sure you cut up those credit cards so you no longer have access to them. We see a lot of people who come in here who have the consolidation loan, then rack up their credit card all over again, so they're in hot water again," Ms. Campbell says.

• If you're in debt, seek credit counselling from one of the free or low-cost services provided by the many non-profit credit counselling agencies across the country. Most of these agencies are associated with a city or town and are listed in the phone book in the blue municipal government listings.

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