(MONEY Magazine) – If you've been dreading trips to the mailbox recently for fear of the monster credit-card bills that may lurk within, you have plenty of company: Americans whipped out their plastic with abandon last year, charging a full 25% more than they did in 1993 ($701 billion vs. $562 billion). Indeed, according to the American Bankers Association, the average American now carries nine credit cards with a combined balance of about $1,600, up 23% since 1992. Worse, credit-card interest rates have begun edging up in recent months (see the table below). And most will go up again in response to early February's half-point rise in the prime rate to 9%. Here are four smart moves that will help you get the most out of your cards and avoid being buried in debt:

Don't pay 18% when lower rates are readily available. With credit-card issuers falling over themselves to get your business, today it's easy to find a low-rate, no-fee credit card. You can start by checking out those listed in the table on page 44 or in the CardTrak survey available from RAM Research, a Frederick, Md. company that monitors the credit-card industry ($5; 800-344-7714). If you're already carrying a balance on one or more high-interest-rate cards, don't despair: These days you can transfer existing balances to most new accounts free of charge, so it pays to close a high-rate charge account and shift the balance to a new, lower-rate one.

You might be especially tempted to transfer your balance to a card offering a so-called teaser rate. For example, Capital One Financial (formerly Signet Bank) of Richmond invites new MasterCard and Visa customers to pay introductory rates of only 6.9%. The catch: Teaser deals generally expire after six months or a year, at which point the rate can jump as much as 12 percentage points. New holders of GTE MasterCards, for example, will watch their interest rates skyrocket from 9% to 19.4% (the prime rate plus 10.4 percentage points) after six months. The solution: Keep track of when the offer ends. If you can't pay your debt by then, be ready to switch to a card with better terms.

When card hopping, be sure to guard against a classic mistake that will make your debt explode: transferring a balance to a new card only to run up charges on an old card all over again. Benjamin Dover, author of Life After Debt: The Blueprint for Surviving in America's Credit Society, warns: "Because people can move their debt around to new cards for free, they can easily double or triple their credit-card bills, without paying off any of that debt." So be sure to close accounts that you don't need.

Make the largest monthly payments you can afford. You may believe you're A-OK as long as you make the minimum payment on your account each month. That amount can be quite small: Last year, for example, Citibank dropped the minimum monthly payment on its standard cards to just 2.1% of the balance.

But watch out: If you don't fork over at least 3% of your balance every month, interest charges will gobble up most of your payment. "Those low minimums are an absolute horror show for consumers," says Robert McKinley, president of RAM Research. Consider: If you charge $1,000 at today's average interest rate and then pay 2% of your balance off every month, after one year you would still owe $935-and it would take you more than 20 years to pay off the $1,000 entirely. Paying 10% a month, though, you would wipe out two-thirds of your principal in a year.

Beware of card companies bearing gifts. Have you recently received a card offer promising free airline mileage or credit on your phone bill for every dollar you charge? Welcome to the seductive world of co-branded cards, in which banks and corporate sponsors offer rewards in return for your business. Citibank, whose cardholders have more than $39 billion in balances outstanding, offers four cards linked to co-sponsors (American Airlines, Apple Computer, Ford and the National Football League).

Before you take the bait, whip out your calculator and figure out how much you'd have to spend to earn your rewards--and what that would cost you in interest. Typically, co-branded cards come with an interest rate of about 18%. If you're one of the seven in 10 Americans who carry a balance every month, that means you'll pay more than $100 extra in interest in your first year for every $1,000 you charge--quite a premium to pay for a slight discount on your phone bill.

Don't carry really big-ticket items like, say, your college education on your account. Never forget that cards are one of the costliest ways to borrow money. As an example, a four-year college student who charges $2,000 per semester in tuition at today's interest rates, makes the minimum monthly payments while in school and pays $250 a month after graduating would add a whopping $10,170 to the total cost of his or her education.

A better way to finance large expenditures is to take out a home-equity loan or second mortgage. There's a risk: If you can't pay your debt, you could lose your home. But you'll generally get interest rates far lower than what you'd pay on a credit card. Furthermore, the interest on home-equity loans of up to $100,000 and on mortgages of up to $1 million is tax deductible, while that paid on other kinds of debt is not.


You won't always find the best deals on certificates of deposit at a bank. Brokers such as Merrill Lynch, Dean Witter, Charles Schwab, Smith Barney and Paine Webber offer yields that significantly beat the average bank offerings and rival the highest payouts available from any bank in the nation. In late January, Merrill's six-month CD yielded 6.3%, a point and a half above the average bank yield of 4.8% and just below the 6.6% offered by Imperial Thrift & Loan in Glendale, Calif., which recently boasted the top deal in the nation, according to Bank Rate Monitor ($124 for 52 weekly issues; 800-327-7717). Schwab's one-year 6.8% CD outshines the national average--5.8%--and is close behind Imperial's juicy 7.1%. No wonder the broker-sold CD market grew 67% to $50 billion in 1994.

The CDs you buy from Merrill and the others have actually been issued by banks and are therefore insured up to $100,000 by the Federal Deposit Insurance Corporation. In addition, they are commission-free and bear no hidden fees. Minimums generally start at $1,000, and maturities usually range from three months to five years. Banks turn to brokers to sell their CDs when they want to reach beyond their local customers; because the big Wall Street firms can bring in so much new business, the banks are willing to pay higher rates on the certificates the brokers sell.

The only drawback: Getting your cash back before your CD matures can be tough. You must ask your broker to put your CD up for bid on the secondary market (as if it were a bond), and there's no guarantee anyone will buy your CD, much less pay full price for it. So if you think you may have to cash in your CD before its term is up, you might be better off sticking with a bank, which will always redeem your certificate at face value (minus a penalty, typically three to six months' interest). Or, you could buy a shorter maturity CD.

If you do decide to deal with a broker, be prepared to hear a sales pitch for other products. "Brokerage firms don't make much money off CDs, so they are going to try to sell you other things," says Hugo Ottolenghi, editorial director of Bank Rate Monitor. "CDs are something they can put in the window to draw you in."

- Karen Hube


Banks have made it more costly than ever to bounce a check--the average fee is $19.92 per overdraft, up 11.5% since 1991, according to Bank Rate Monitor. So if you write checks for more than you have in your account, you might want to get some bounce-proofing. Nearly 70% of large banks now offer overdraft protection plans, but read the fine print closely or you could end up paying unnecessary fees and interest charges.

With the most common type of overdraft service, available from banks such as National City, with headquarters in Cleveland, and Chemical in New York City, you must establish a personal line of credit (usually for $5,000 or less). When you need money to cover a check, the bank simply transfers funds to your checking account, debiting your credit line. Interest rates on these lines can run 18% or more, and some banks also tack on annual fees of $15 to $20.

A number of banks, including PNC in Pittsburgh and Wells Fargo in San Francisco, link your checking account with a credit card they have issued to you; when you have an overdraft, the bank posts a cash advance on your card account to cover the shortfall. You pay interest on the money borrowed (average rate: 17.7%) and in most cases a cash-advance fee equal to 2% or so.

Warning: With both of these services, put back doesn't mean pay back. Even if you deposit enough money in your checking account to cover the overdraft the day after it occurred, you will continue to pay interest on your personal credit line until you settle that account. Furthermore, many banks will transfer money to your checking account only in increments of $50 or $100.

That means that if you are overdrawn $10, your bank could deposit as much as $100 in your account. In the case of a plan charging 18% interest, you could pay $1.50 or more in interest and fees on a $10 overdraft. The best way to avoid these charges: Don't wait for your monthly statement to arrive. Call your banker right away to verify the amount needed to repay the entire advance, and pay it off as promptly as possible.

A few lenders, including Bank of America in San Francisco, will shift money from your savings account to cover overdrafts automatically. Fees can be as high as $5 per overdrawn check. You pay no interest on the money transferred, but, of course, your money stops earning interest when it leaves your savings account.

- Kelly Smith