Judging by television commercials and store windows, the holiday shopping season is upon us. Every year, retailers and credit card companies team up to make it incredibly easy for American consumers to borrow money. I will explain two of the most common credit card traps to avoid.
10% Off, If You Open A Credit Card Right Now
If you have ever made a purchase in a big department store, you have probably been offered a store card at the checkout. The most common offer is a discount on all purchases made on the day of the credit card application.
These offers can be valuable if you spend no more money than you had originally planned, and pay the statement balance on time and in full at the end of the month. Just beware the following:
- Interest rates on store cards are extremely high. Even worse, most store cards do not use risk-based pricing. For example, the Macy's credit card has a flat 24.50% interest rate. Whether your credit score is 600 or 800, you will receive a 24.50% interest rate. If you use the credit card to finance a big purchase, the high interest expense would quickly eliminate any savings or bonus points you received.
- When you apply for a store card, you will receive a hard inquiry on your credit report. Although the hit will not be huge, you could lose five or ten points. If you are planning on applying for a mortgage or auto loan in the next few months, those five points could really cost you.
- In general, people tend to spend more money when they use plastic instead of cash. However, it gets even worse if you are given a time-bound discount. If the 10% discount only applies to purchases made that day, you are much more likely to spend more money than you had initially planned.
0% That Isn't Really 0%
When you are ready to buy something in a store, or online, you might be offered 0% financing. However, not all 0% offers are the same. Some credit cards actually waive the interest during the promotional period. Other credit cards do not waive the interest. Instead, the interest is deferred. If you do not pay the balance in full during the promotional period, the credit card would retroactively charge you interest for the full period. In other words, you never received 0% at all. This is only a good deal if you can pay the balance in full during the promotional period.
One example is Apple, which offers 0% financing from Barclaycard.
Many big box retailers have similar offers. Before signing up, make sure you understand whether the interest is being waived or deferred.
If You Do Plan To Borrow, Or Are Already In Debt
No one should be going into debt to finance holiday purchases. However, if you are looking to borrow money, you should plan ahead. Rather than accepting an offer at a store, you should shop in advance for a 0% offer with waived interest. For example, Citibank offers Simplicity, which waives interest on purchases for 21 months. If you still have a balance after 21 months, interest will only be charged on the remaining balance and no retroactive interest would be charged.
If you are already in credit card debt, your focus should be getting out of debt rather than adding to it this holiday season. Perhaps the best gift you can give yourself is a promise to cut up your cards and eliminate your debt. Marketplace lenders have been growing rapidly, and make it easy to refinance high interest rate credit card debt to a much lower rate. You can compare providers at MagnifyMoney (my website). You can shop around for the best interest rate without hurting your credit score. At
In the last year, obtaining credit has become a lot easier for many Americans. This holiday season will offer a test. Have we become more disciplined after learning from the 2008 crisis? Or, are we ready to start borrowing again?
