Shopping for Credit

To many people, the holidays are a time for giving. That often means buying; and when money is short, people consider obtaining credit. They think it will be easier on their wallets if they can stretch out payments over a longer period of time. This can be done by using a credit card, signing a retail sales agreement with a merchant, or borrowing money from a bank or loan company.

All of these arrangements let a shopper purchase goods without having money on hand, but are they really easier on the wallet?

The law requires that creditors tell a borrower before he or she signs a credit agreement what it will cost in the long run. This information is contained on a Truth in Lending disclosure statement. However, most credit agreements look so complicated that many people do not even try to understand them.

Even if the shopper can't figure it all out, there are a few key items of information that he or she should look for before signing a credit agreement. She may be in for a surprise at how much money it costs to "buy now, pay later." She may then decide not to borrow money, or to shop from another merchant.

Before signing anything, look for these important terms:

FINANCE CHARGE is one of two terms required by law to be in larger print than other information. It tells in a dollar amount the additional cost one must pay.

INTEREST is almost always the largest part of the figure; it can be thought of as the "rent" one pays for money - or for time, if the shopper is buying on time from a merchant.

ANNUAL PERCENTAGE RATE (APR) is the other "large print" item in the disclosure statement, and the best way to do comparison shopping. For example, borrowing $108 from a finance company for 6 months for a finance charge of $11.65 may not seem too bad. But when the borrower sees from the disclosure statement that it is an APR of 36%, she may realize it's not a good deal.

AMOUNT FINANCED is the amount of borrowed money.

TOTAL OF PAYMENTS is the actual dollar amount which will be paid back. It is an important figure to look at because the careful shopper might discover that some things were added that she didn't know about, and may not want, such as a charge for credit insurance.

MONTHLY PAYMENT is the amount of money which is paid each month to repay the loan. It is often the only thing a borrower checks before obtaining credit. While it is important to know what payments must be made as part of each month's budget, this is not a good way to tell what credit will really cost. In fact, lower monthly payments mean that the credit will cost more in the long run.

With credit cards, the disclosure statement is only given when an application is made for the card. The monthly statement, however, explains what Annual Percentage Rate (APR) is used. (Many creditors do not require a finance charge on a credit card account if the full amount is paid within a certain time. The monthly statement will contain specific information on the time, if that is the case.)

Finally, there are a few selling practices often used during the holiday season that sometimes present traps for the unwary. Some creditors or department stores will offer to let their customers "skip December's payment." What that usually means is that one month's extra interest is added on to the balance. The only benefit to a borrower who chooses to skip the December payment is that she is not considered to be behind in her payments.

"Buy now, pay later," is another common slogan heard around the holidays. This can mean a couple of different things. It may mean simply that they, the merchant, offer a credit agreement, for which the borrower pays a finance charge and starts monthly payments in January or February. On the other hand, it may mean that the merchant offers a "30-day (or 90-day) same as cash" arrangement, which means that if the price of goods is paid in full within 30 (or 90) days, no additional charges are added. The question a shopper needs to ask about that arrangement is,

"What happens if I don't get it all paid off in that time?"

It is important to learn what finance charge will be made in that case. Another thing a shopper might ask a merchant with whom she is making credit arrangements is whether the merchant intends to turn her account over to a finance company. Many people who buy from a merchant, signing a credit agreement, are surprised later to learn that the merchant has "assigned" the agreement to a finance company, which is now the buyer's creditor.

Using credit may be a tempting way to assure that the family has a nice holiday. It may lead to problems later, however, if the borrower has too much credit, or if she finds that it is more expensive than she realized. Taking a few moments before signing anything, or pulling out a credit card, may end up saving money and hassles in the long run.