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| The Basics | Want a credit card with your purchase?
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Retailers use instant-credit deals to hook customers on their cards with hard-to-resist discounts available today. But the costs run high.
By Liz Pulliam Weston
The instant-credit deals at retailers nationwide just keep getting better:
- The Gap, for example, doesn't stop with the usual 10% off your purchases on the day you apply. Cardholders also get 10% off on the first Tuesday of every month, plus $10 certificates for every $200 spent on the card. Oh, and cardholders get free shipping on The Gap's Web site, as well.
- Or you can sign up for a Macy's card, which in addition to 10% off your first shopping excursion invites you to special cardholder-only sales and gives you certificates equal to 1% to 3% of every purchase.
- Or there's Target, which allows you to repeat your 10% discount shopping day every time you earn 1,000 points (which you can do by spending $1,000 at Target or $2,000 anywhere else on Target's co-branded Visa card).
- Home Depot isn't currently running a 10% discount, but it does offer no interest and no payments for six months on purchases over $299.
So what better time than the holiday season to start taking retailers up on their generous offers and saving bundles of money?
Oh, come on. You knew there was a catch. In fact, there are plenty of them.
Sky-high interest rates. Most retail cards have interest rates north of 20%, compared to 13% for the average bank-issued credit card. That's a difference of more than $140 a year on a $2,000 balance. The rates on the typical retail card are so egregious that Sen. Charles E. Shumer of New York recently asked the Federal Trade Commission to investigate retailers' credit-issuing practices and to require more prominent disclosures of their cards' rates and terms.
Potential credit damage. Each time you apply for credit, you can knock five points or more off your all-important credit score, the three-digit number lenders use to help gauge your credit-worthiness. (Learn about credit scoring in Beef up your credit score in 5 steps.)
The lower your score, the worse the interest rates and terms you'll face on other loans. In fact, even a few points' difference can cause you to pay thousands of dollars more in interest over the life of a major loan like a mortgage. In addition, some retail cards don't report customers' credit limits to the bureaus. That can ding credit scores, as well. Finally, having lots of open credit lines makes some lenders nervous, but shutting down credit accounts -- even unused ones -- can clip your score, sometimes significantly. That's why Fair Isaac, creators of the leading FICO credit scoring formula, advises consumers to apply only for the credit sparingly; once you've got the card, you've done the damage; you can't undo it by closing the account, and doing so may make matters worse.
Related news and commentary on MSN Money
Hidden gotchas. Breathtaking interest rates aren't the only way retailers win with these cards. The interest-free offers at Home Depot and most electronics chains -- Best Buy, Circuit City, Radio Shack -- can easily turn into financial nightmares if you don't pay off your balance before the deadline. A $10,000 deferred-payment purchase on a Home Depot card, for example, could instantly accrue $1,097 in interest if you don't pay it off before the six-month grace period ends. Also, some retailers put limits on the discounts or benefits you can earn; Bloomingdale's requires you to spend at least $1,000 before you can earn reward certificates, and its 10% initial discount is capped at $100 for bedding purchases and $250 for furniture. (Granted, that's not a limit you'll run into unless you're a relatively big spender, but it would be a bummer to find out your dining-room set didn't come at the discount you thought.)
Constantly changing terms. All credit issuers reserve the right to change their deals, but retailers are notorious for relentlessly tweaking their rules. The 10% discount might leap to 15% next week or disappear entirely. You may have to spend more to get the same number of points, or face caps or restrictions on using benefits you've earned if the retailer decides it's been too generous.
All this has caused some savvy consumers to swear off instant credit deals altogether. That can be a smart course if you've already got more plastic than you can keep track of or if you're going to be in the market for a major loan in the next few months. Curtis Arnold of CardRatings.com, an expert on credit card deals, is shopping for a new mortgage and says he'll be shutting his ears to the siren call of instant credit deals until the loan has closed.
"They could give me 90% off right now and I wouldn't bite," Arnold said.
You also need to be a fairly loyal customer of a particular chain to get the maximum benefit from a retail card. Ben Woolsey of CreditCards.com believes most consumers are better off with a regular cash-back or other reward credit card.
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