Ask Liz Weston

photo credit: christopher.woo

The countdown to the holidays has begun, and if you’re like most people you’re trying not to spend a fortune this year. If the usual “make a pretty basket of soaps!” advice isn’t cutting it, here are some suggestions that might work for you:

Start later. Shopping all year round can help you snag some pretty good deals, but typically, the longer you shop, the more you spend. Retailers have been saving their biggest discounts until late in the season, so if you can stand to wait, consider doing the bulk of your shopping in one concentrated burst later in the season. (One example: DealNews.com says high-end, name-brand flat-screen LCD TVs were 8%-12% cheaper last December than at any point in November, including Black Friday and Cyber Monday.) Free shipping offers start to get scarce about a week before Christmas, but DealNews CEO Dan de Grandpre predicts you may be able to find free shipping as late as Dec. 22 or 23 at some sites. If you opt to do your shopping last minute at the mall, be sure to bring your helmet and pads.

Have the talk. The easiest way to trim costs is to trim the gift exchange. Many families buy gifts only for the kids, or pull names from a hat, or gang up to buy more expensive presents (which is a great approach for teenagers, mothers-in-law and other picky recipients). Suggest to friends that you bypass presents in favor of experiences—coffee out, a pedicure together, a movie and popcorn.

Use your rewards. Most credit cards these days have some kind of rewards program attached. You may be able to can use your rewards points to buy merchandise, gift cards and magazine subscriptions. If you’re feeling really generous, you can use frequent traveler points to get someone a free night at a hotel, a free airplane ticket or an upgrade to first class.

No “Secret Santas.” The recession should have killed this half-baked notion of buying presents for co-workers and others whose tastes and proclivities you shouldn’t be expected to know. If not, counter with a better idea: the white elephant gift exchange, which is at least fun for all participants. Set a low limit on the amount that can be spent ($10 is good, $5 is better), put the gifts in a pile and give each person a chance to pick. Each subsequent person can pick from the pile or steal from the previous pickers. Hilarity ensues.

Give heirlooms. Don’t wait until you’re dead to pass on family jewelry, china, photos or Great Uncle Phil’s banjo-playing taxidermied frogs. Declutter while you’re still around to enjoy the reaction.

Dear Liz: I have only one credit card which I pay off every month, and don’t really need another one. I recently received an offer of many frequent flier miles—enough to pay for a nice vacation—if I would open another account. If I accepted the new card, used it occasionally and always paid in full, then canceled it after about a year, would that hurt my credit score? It’s currently pretty decent, about 750.

Answer: Opening and closing accounts can hurt your more-than-decent score. That’s why the company that created the leading FICO credit scoring formula recommends we apply for credit sparingly.

At the same time, it’s a good idea to have more than one credit card. Having a “spare” card can be handy if your other card needs to be closed temporarily because of fraud, or if your issuer decides to change your terms for the worse.

Opening a card just to get an introductory benefit, such as a pile of miles, isn’t the best idea—particularly if you would have to pay a substantial annual fee, which is typically of frequent flyer cards, to keep the account open. Instead, look for a card you can live with for a good long time. Many rewards cards offer cash back or other benefits and don’t have an annual fee. You can find current card offers at CreditCards.com, CardRatings.com and Bankrate.com, among other sites.

photo credit: Qiao-Da-Ye賽門譙大爺

Behind on your credit-card payments? Your credit score isn’t the only thing at risk. You’re also very quickly blowing up any chance of collecting those rewards that come with your card.

CardHub.com, a leading online marketplace for credit cards, conducted a mini-study that examined the fine print of reward programs for the top six major credit-card issuers.  Among its findings:

• In the last 12 months, 15% of U.S. adults have been late making a credit-card payment. The credit-card default rate in 2009 is the highest since 1991.
• If an account becomes delinquent, all points earned under American Express rewards program may be lost.
• If an account becomes two months or more delinquent, all points under the Discover rewards program will be lost.
• Other issuers, such as Bank of America, Capital One and Citibank, generally will not allow you to earn rewards while your account is delinquent. (According to the survey, Chase did not disclose any information about its programs.)

What’s a cardholder to do?

Face the cold hard facts. Reward programs only make sense if you pay your balance in full each month. If you carry a balance or can’t make the payment on time, a reward program isn’t for you.  If you’re pinched, you need to curb your spending and pay off the debt.

And let’s be clear here: Issuers can change the terms and conditions of their reward programs at any time or for any reason. There’s no notification period. No warning needed. That’s different from the current rules that require at least 15 days notice before issuers change your interest rate or fees. (Under the new law, that notification must come at least 45 days before any changes are made to your account.)

Yes, rewards are super under the right conditions.  Just make sure you’ve picked a card and program that work for you – and pay on time so you don’t blow your bennies.

Want to learn more? Check out my columns for more tips:

• 20 cards that pay you back
• Credit cards with the happiest users
• 9 big credit card myths

One third (33%) of consumers say their card companies have altered their rate and terms for the worse, according to a new survey by Credit.com. Those polled reported their card issuers:

• Increased their interest rate–19% (up from 15% in February survey)
• Increased their fees–14%
• Lowered their credit limit–14% (up from 8% in February survey)
• Increased their minimum payment due–12%
• Reduced their rewards program–9%

This national telephone poll was conducted for Credit.com by GfK Custom Research North America from June 12-14, 2009. A total of 1,000 interviews were completed, with roughly 500 female adults and 500 male adults. The margin of error is +/- 3 percentage points for the full sample.

For more on dealing with the credit crunch, read:

• Banks have declared war–on you
• 6 steps for paying off toxic debt
• The credit card party is officially over
• Thaw out your frozen credit

Bankers are talking tough now that the Senate has passed sweeping credit card reforms. From today’s New York Times:

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

No doubt some issuers will try each of those gambits–and then wind up backing off as their savviest (and most creditworthy) customers go to the competition.

Because the card industry is still highly competitive, and will remain so, at least when it comes to attracting and retaining low-risk customers. The only way I can see these threats sticking is if the card issuers collude (risking FTC intervention). While we waited for the lawsuits to grind through the system, we savvy consumers could use debit cards, checks or cash for our transactions–because heaven knows we’re not about to settle for a lousy credit card deal or pay a dime of unnecessary interest.

It’s true that it will be harder for college students to get credit cards, and those with poor or mediocre scores will continue to have trouble accessing credit, as they have since the credit crunch began.

NYT columnist Ron Lieber has it right: bankers’ ominous warnings about the credit-worthy paying the price for this legislation are so much sabre rattling.

Dear Liz: I know closing accounts can hurt my credit scores, but I want to cancel one of my reward credit cards that has a high annual fee and open a different reward card with no annual fee. Will opening the second credit card restore the drop in my credit score that will occur if I cancel the first card?

Answer: No. Both closing and opening accounts can ding your scores. But the damage is likely to be minimal if you have plenty of other credit.

If you pay your credit cards in full every month, rewards programs can give you some nice perks: free travel, free stuff, cash back.

But the programs are getting stingier as banks try to battle the recession and the credit crunch.

“The banks are strapped for cash. As a result, consumers will have to spend a lot more than they did last year to earn similar rewards,” says Jody Farmer, vice president of strategic marketing for CreditCards.com, whose Web site helps consumers compare credit-card offers from across the country.

CreditCards.com suggests six ways to tap your card’s highest rewards earning potential:

Redeem now: If you’ve earned a lot of points, redeem them sooner rather than later. (The redemption value of points is largely hidden and at the discretion of the card issuer, so the true devaluation of rewards occurs at this stage.)

Switch cards: If you’ve recently redeemed your rewards from a longstanding card, consider shopping around for a new card with a better program. Consider programs that offer extra rewards for the type of spending you do the most — such as grocery shopping, gas and drug-store purchases. Choose a reward that you will actually use and will provide a meaningful incentive.  For example, if finding the time and money to go on a far away vacation isn’t in the cards, airline miles may not be an optimal reward choice.

Go for cash-back rewards: Cash-back rewards are straight-forward in how they are earned and what they are worth. They typically don’t have redemption restrictions such as expiration dates or black-out dates. American Express Blue Cash was the favorite cash-back card among the credit card experts I recently interviewed.

Look for hidden fees: Read the fine print. You might be earning a lot of points or miles but if you’re carrying a balance, you’re probably also paying a higher interest rate or a stiff annual fee — and that negates the freebie rewards concept. Also, understand that your rewards are subject to term changes — with very little or no notice. So keep track of your expiration dates on points or miles so you understand when the system changes.

Double down: To earn more rewards, you might want to add your spouse as an authorized user on your account so you can leverage all of your household card spending and increase your annual reward-earning power.

Loyalty counts: Until it’s time to switch, be true to one credit card to maximize your rewards-earning potential. Choose a card with a low or non-existent annual fee. Then confine your spending to that one card to reap the best rewards.

For the latest credit-card news, check out my columns:

• 20 credit cards that pay you back
• 18 ways to foil credit card thieves
• Credit cards with the happiest users

I’m always on the alert for great new rewards cards, and there’s one that might be a great fit if you spend time at Hilton-chain hotels.

The Hilton HHonors Surpass Card, just launched from American Express, offers all the bennies of the existing Hilton HHonors card, plus a few, including:

• 9 points (triple bonus points) for every eligible $1 spent at Hilton Family hotels, 6 points for every $1 spent at supermarkets, drug stores or gas stations and on phone, TV and Internet service, plus 3 points for every $1 spent elsewhere
• complimentary standard membership in Priority Passâ„¢,  which gives you access to more than 500 airport lounges worldwide
• automatic Diamond VIP status with an annual spend of $40,000 (Diamond status gives you automatic upgrades, access to executive floor lounges, free breakfast in some locations and a 50% bonus on all HHonors Base points earned

Savvy travelers have long since figured out that hotel cards often offer a better deal than airline cards. It’s typically easier to earn and use points; plus you often get more bang for your buck, since your hotel bill can often dwarf your airfare.

You have to travel enough to justify the $75 fee (although a couple stays in an airport lounge would do that). If you’re not a big traveler, Curtis Arnold at CardRatings.com points out that Schwab and Fidelity have both launched premium cards with an excellent 2% redemption rate (payable into your investment accounts there). Thanks, Curtis!