Shaving borrowing costs on credit cards and other money sources

The news might almost have been overlooked during the currency-transaction controversy that hit the Bank of Boston earlier this month. The bank's credit card operations will soon move from Massachusetts, where there is a ceiling on credit account interest rates, to New Hampshire, where there is none. When the bank first announced its intention to find another state for this side of its business several months before, the news created quite a stir. But this time, word of the actual move was all but lost in the larger currency story.

Credit cards have become big business for banks, generating millions of dollars in revenue. Being able to charge a few percentage points more for credit card balances can make a big difference in a bank's profits. But as more banks look for ways to charge more on credit cards, more consumers are looking for cheaper ways to borrow money.

Credit cards are probably the easiest way to borrow. You can even go to a bank and ``charge'' cash up to certain limits. But depending on where the credit card operations are based, you could be paying 20 percent or more a year for the privilege. You can also charge purchases through credit accounts at department stores and mail-order houses, but depending on the state you live in, the cost can be very high here, too. For example, in all but about 20 states, customers of the giant Spiegel mail-order firm face a 23.94 annual percentage rate on outstanding balances.

Meanwhile, banks and savings-and-loans have actually been lowering their interest rates, but credit card and charge account rates have remained stable. Banks' rates are still high compared with a 4 percent inflation rate and a 101/2 prime rate, but they have begun to inch down. The rate on personal unsecured loans from a savings-and-loan institution is in the 17 to 18 percent range, a rate that is comparable to the lowest rate on credit cards, says Wayne Bengston, program director for consumer lending at the US League of Savings Institutions.

By shopping around, Mr. Bengston says, you should be able to find a rate one or two percentage points lower, particularly in large, competitive markets. And if you have some sort of security, or collateral, you should be able to get a rate lower than that.

One ``monkey wrench'' has been thrown into this picture, Bengston notes. As of March 1, finance companies will not be permitted to accept household goods already owned as collateral. This includes furniture, clothes, appliances, one radio or television set, kitchenware, or personal effects such as wedding rings. While finance companies are usually the most expensive sources of loans, with rates well above those for credit cards, the Federal Trade Commission ruling that brought this about could be expanded to banks and S&Ls, he notes.

Most people, however, do not use these basic items as security for loans, he adds. The car, boat, or stereo purchased with borrowed money serves as its own collateral.

You can also find collateral in some unexpected places. Sometimes, says Dorothea Kaplan, a Chicago lawyer, people with an urgent need for money consider cashing in certificates of deposit early or canceling cash value life insurance. In the case of the CD, she says, keep it and use it for collateral.

For example, on a one-year CD earning 10 percent, she notes, you will be penalized $50 per thousand of investment, which represents six months' interest at 10 percent. For a $10,000 CD, this represents an immediate loss of $500. To make that up in an investment, you would have to get a return of at least 15 percent for nine months.

By using the CD as collateral, you avoid the penalty and gain an additional 3 or 4 percent, depending on the rate at which you borrow. Also, you pick up tax-deductible interest payments, while still keeping the CD.

One key to making all this work, Ms. Kaplan says, is planning. While using a credit card or charging a purchase over the phone is certainly easy and fast, ``it's not hard to walk into a bank and borrow $5,000. Sometimes, all you need is a checking account.'' But this requires planning your purchases, shopping around for the best rates, and fitting loans into an overall financial picture.

One of the cheapest places to borrow money is a credit union. Credit unions are now charging 15 to 16 percent, and you can sometimes get the money in less than a day.

Of course, you have to be a member of a credit union, which means your employer, or some other group to which you belong, has to have a credit union or belong to an overall credit union organization which includes similar companies or groups.

Typically, credit unions can write unsecured loans of up to $2,500. Some may require that you be a member for several months first. You may also be required to keep a small amount of money, say $100, in the account until the loan is paid off.

Then there is life insurance. Although sales of whole life insurance have tapered off in recent years, many people still have outstanding policies that can serve as excellent lending sources, sometimes with interest rates of just 6 to 8 percent.

Over the years, your life insurance has built up a permanant cash value and a surrender value. The permanent cash value is slightly smaller, and you can borrow any or all of this money. The interest payments will be added to your premiums, and you can pay back the principal whenever you like.

Finally, Bengston says, more people are borrowing against the value of their homes. ``Lines of credit on home equity have been growing very rapidly,'' he observes. In many cases, he says, rates on these open-ended lines of credit are only a couple of percentage points above current first-mortgage rates.

While these loans are fairly inexpensive and easy to obtain for homeowners, Bergston cautions people to measure carefully just how much equity to use. Someone approaching retirement age, for instance, could discover he has borrowed so much against a house that he won't have enough to pay off the debt after retirement.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

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