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Recent articles by Liz Pulliam Weston: • A survival guide for the uninsured, 11/30/2005 • Bounce back fast after bankruptcy, 11/30/2005 • The fine art of holiday tipping, 11/27/2005 More... |
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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:
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. "Many reward credit cards featured on our site -- from American Express, Discover Card, Citi and Chase -- offer 5% cash back on all grocery store, drugstore and gasoline purchases and 1% cash back on all other purchases," Woolsey noted. "And, these cards typically have a 0% introductory APR for 12 months and a reasonably low variable APR thereafter." But the discounts, reward certificates, special financing deals and entre to special sales can make some cards worth the risks for some shoppers. Take em up on it, but If you're in the market for savings, here's how to choose and use the best deals: Research your options. The whole point of the 10% discount offer is to induce you to make a snap decision. But smart consumers check out the deals long before they approach the checkout counter. You'll want to know how the reward program is supposed to work, what interest rate you'll be charged and what grace period you'll be offered, if any. Most retailers post these details on their Web sites, although sometimes finding the link can be a challenge. (Call the retailer's toll-free number and ask for help if you can't find the information you need.) At the very least, ask for a brochure at the counter and get the important details before signing up. Make it count. Given the potential impact on your credit score and the added hassle of tracking another set of due dates, interest rates and terms, you shouldn't apply for a card if you're not getting a significant break and if you won't use it frequently in the future. Stick to retailers you use the most, and take maximum advantage of any discount. If you're getting a one-day discount, for instance, you might try to do most of your back-to-school, home improvement or holiday shopping at the store the day you apply. Opt for the co-branded card, if possible. Some retailers offer two cards -- their in-house version that can be used only at their stores, and a co-branded card (typically a Visa or a MasterCard) that can be used anywhere major credit cards are accepted. The co-branded cards typically have lower interest rates and better terms; many also offer better or additional benefits. Plus, major credit cards are typically treated better by credit-scoring formulas than store cards, which tend to have lower limits and reduced credit standards for applicants. Pace yourself. Apply for no more than one or two of these cards a year, preferably with a six-month waiting period in between since that's about how long a newly opened account can depress your credit score. Transfer your balances. The best way to use a retailer's card, or any credit card for that matter, is to pay off the balance in full every month. If you can't and won't be able to pay it off within a few months, consider transferring the balance to one of your lower-rate cards (either by phone or by using one of the low-rate card's convenience checks). You'll probably have to pay a balance-transfer fee, but the cost could be more than offset by the interest savings. Use your benefits quickly. As frequent fliers have discovered, the more rewards points created, the harder it eventually becomes to use them. It's generally better to use any retail card benefits as you earn them, since the retailer may change the rules at any time. Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board. | |
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.