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Credit card debt, terms limit holiday spending

This holiday season, experts say onerous credit card bills and changes in credit card terms could limit consumer spending, potentially adding another headwind for retailers.

For Cathy Getz, the holiday season has always been a time to lavish her family with gifts — regardless of whether there was money to pay for it.

“If there was no money the card came out,” Getz said. “Anything that was on the list, so to speak, would be purchased, whether or not we could afford it. We always had plastic.”

This year, things are different: Fed up with rising fees and determined to pay off her debt from years past, Getz has cut up her credit cards. That means she’ll be spending less on Christmas presents for her kids and grandkids this year and thinking more about the spiritual side of the holiday season.

“It’s still going to be Christmas, but we’re not going to be overburdened with credit card debt or any other type of debt," Getz said.

As holiday season shoppers struggle with a difficult economy, one of the big issues many face is onerous credit card bills left over from years past, when credit was generally easier to come by and cheaper to maintain.

In response, consumers are cutting back on spending and paying with cash instead of credit. Many say they are frustrated by changes in credit card fees, limits and interest rates stemming from the financial crisis that have made it more expensive to finance the holidays with plastic.

“(People are) taking a hard look at what their spending habits are and not buying things that they can’t afford,” said Bill Hardekopf, CEO of the consumer information site

Revolving debt, which is made up almost entirely of credit card debt, has been falling steadily as people pay down their credit card debt and limit their use of plastic. Outstanding debt has fallen for 13 straight months to a seasonally adjusted $888.1 billion, according to Federal Reserve figures released Monday, after hitting a peak of $975.2 billion in September 2008.

The reduction in debt is probably an outgrowth of rising unemployment, which limits spending, and a reduced availabilty of credit.

Many consumers also are working hard to get their balance sheets in order, following years in which debt for some spiraled out of control.

Some 6 percent of consumers, or 13.5 million people, are still carrying debt from last year’s holiday season, according to Consumer Reports.

A potential reduced reliance on credit cards would add another headwind for retailers, who depend on the holiday season for a large chunk of profits but are facing another year of potentially sluggish sales.

‘It has affected my Christmas spending’
Over the past year Leo Corona has seen the interest rate on both his credit cards raised, and one card company has lowered his credit limit.

“It has affected my Christmas spending because if I wanted to use the option of (credit cards) I know I’m going to be bogged down with a higher payment and a higher interest rate,” Corona said. “So naturally, I’m going to spend less.”

The 61-year-old Portland, Ore., resident did have to use his credit cards to charge airplane tickets for a family vacation with his wife and college-age children. But he expects there won’t be much holiday spending besides that as he works to pay down his credit card debt completely.

“I just don’t want to be mad every time I see their rates,” said Corona, who is recently retired.

Raising rates, lowering limits
Even as other interest rates have fallen, credit card rates have risen since last year. Americans are currently paying an average interest rate of 13.71 percent on credit card debt, up from 11.88 percent in May 2008, according to the Federal Reserve.

An estimated 58 million consumers also had their credit limits reduced between April 2008 and April 2009, according to FICO, the company that developed the eponymous credit scores.

Some increases in credit card rates and fees have come as a result of the recession, and others have come ahead of more stringent regulations on credit card practices, the bulk of which are scheduled to take effect in February. The regulations will make it more difficult for credit card issuers to do things like raise interest rates on existing debt or change rates soon after a card is issued.

The American Bankers Association, a trade group, has generally opposed the stiffer regulations because they say it gives them less flexibility to manage for risk on a person-by-person basis. It warned that such regulations would lead the credit card issuers to impose higher interest rates and more annual fees on a broader range of customers, including those with strong credit histories, and also would result in lower credit limits and restrictions on reward programs.

“Sure enough, they lived up to what they said,” Hardekopf said.

In years past, Mary Lou Sweenie, 59, has used her credit cards during the holidays and then rolled over the balance using low interest-rate transfer promotions that were common. But after dealing with issues such as an unexpected sharp increase in her minimum payment, Sweenie recently decided to pay off all her existing credit card debt and is trying not to take on any more.

“I don’t trust them,” said Sweenie, who lives in Chattanooga, Tenn.

Sweenie expects that her holiday spending will be cut in half this year because she doesn’t want to use her credit cards and doesn’t expect her bonus to be as big as in years past. That means cutting some people from her holiday list and trading lavish holiday get-togethers for something more frugal, like a spaghetti supper.

A wake-up call
For some, the changes in credit card terms combined with the effects of the recession have served as a wake-up call to get control of credit card debt.

Getz, the Pennsylvania woman who is focusing more on the spiritual side of Christmas this year, estimates that she has about $18,000 in credit card debt. That includes about $12,000 she amassed while running a religious gift store, which she closed in June after a sharp drop in business.

Over the years, Getz said she watched with increasing discomfort as customers would buy things they couldn’t readily afford using credit cards. Meanwhile, she, too, was getting in over her head with credit card debt.

After her business closed and her husband had his hours cut, Getz said she realized they needed to get their debt under control.

“I said, ‘No, this is it. We’re done,’” she said. “We have actually cut them all up. They’re out of our lives.”

Getz, who is currently retraining for a career in medical billing and coding, will decorate the house and celebrate the holidays this year but will do it more frugally. She also will give fewer gifts, and those she does give will be more practical.

She’s also asked her grown children not to buy Christmas gifts for her and her husband.

“'Don’t spend your money foolishly,’ I told them all,” she said.