Tis the season! So much shopping to do and when it seems there is a sale everywhere, it’s hard to resist buying a few things for yourself, the home, etc. Sometimes when money starts going out in December, we just go with the flow and figure we’ll worry about the budget “next month.” Similar to our diets – once control is lost, we just let go and enjoy the ride. The release can be therapeutic for many, and it allows us to blow off steam so that we’re ready to knuckle down and get back to business once the festivities are over.
Stores and credit card companies know we tend to be a little looser with our purse strings and willpower during the holidays. We have so much to do and buy and have limited time and money with which to do it. Enter the store credit card pitch.
When the cash register is beeping away, and your purchase receipt is getting longer and longer, it’s hard not to listen when the store employee says, “Would you like to apply for a [insert store name here] card? You would get [insert amazing deal here]!” It might be 10% or 20% off your current purchase or perhaps it’s no-interest/no payments for a certain amount of time? Or maybe you’ll get a gift card so you can come back and spend more later?
Whatever the deal, whatever the store, the deals usually sound great at the time, but let’s look at why you need to be careful. You may end up paying way more than the discount you receive.
Also, if you are currently in escrow for a home, you need to be very careful about opening any new credit card accounts. The credit check necessary when opening a card can have an adverse effect on your credit and if you charge a significant amount, it can affect your loan to value (LTV). It’s best to wait until your home purchase has closed before buying any expensive items on credit. If in doubt, always check with your Loan Officer first.
Let’s look at some common deals so you can be prepared once an offer is extended.
A certain percentage off entire purchase
The current average store credit card annual percentage rate (APR) is 24.99%. Many jewelry retailers can be as high as 28%, even for customers with good credit. If you accept an offer of 10% off your total bill and then don’t pay entire bill in the first month, you are paying the company back the 10% you saved, plus an additional 14.99%. It depends on how often your credit card compounds though and that can vary card to card.
Keep in mind, if you’re savvy and disciplined, you can benefit from that discount but you must pay the whole purchase off the first month. If you don’t have stellar credit, the APR can be even higher, so be careful. Or, if the store offers, take the account option that is tied to your debit card so you can get a discount and not carry a revolving credit card balance.
No interest/no payments
Financial advisers often caution about accepting these offers because the downside can be quite severe. But if you know and understand the caveats of these offers, you can utilize them for the excellent deals they are. The catch is they must be paid off completely before the no-interest/no-payment time period is up. Even if you don’t have a minimum payment due each month, you still may be accruing interest every month.
Ignore the “no payment” option and set up a payment plan for yourself that will have the entire bill paid before your trial period ends, with no exceptions. To illustrate how crucial this is, let’s say you’ve accepted a 12-month, same-as-cash offer (another name for no interest/no monthly payments).
If you bought a big-ticket item (usually the case for these offers) such as a new refrigerator, let’s say for $2,000 total, you need to calculate the entire financed balance and divide it by 12. Make sure it’s going be paid in full by the end of your 12-month period.
Pay that amount each month without fail. If you pay off the refrigerator within the 12-months, you truly do get it for no interest or same as cash. However, if you have any balance at all, possibly even $1, you run the risk of being billed for the entire 12 months of interest. Bottom line: read the details of your agreement carefully.
A free gift or gift card with new account
This is another impulse deal. You’re stressed, at the checkout stand and under pressure to get your errands done. It’s not uncommon for stores to offer hard-to-find or premium items as an enticement to opening a credit card. Or a gift card, which can help with your additional shopping. If it’s not something you need or are looking for, resist temptation and politely say, “No.” Or if you do want the item, use the same rule of thumb: pay off the card the first month. You get your free gift and won’t pay more than your original bill. Keep in mind, when your January budget is already feeling the pinch from the end of the year, that bill may not be as easy to pay as you expect.
Be mindful of pressures
If you’ve decided to resist these offers or accept them only on your own terms, please be courteous of employees who extend the invitations. Because these offers are so profitable for the stores, it’s not uncommon for employees to be under tremendous pressure to open new accounts. These incentives can be in the form of a daily or monthly contest where they receive a prize for having the most or disciplinary action for not having enough. Stores may even utilize secret shoppers to make sure the employees are asking every single shopper if they want to open an account. Please be patient with those pitches and just say, “No thank you,” if you’re not interested.
A little relaxing of the rules during the holidays can help celebrate the season but be mindful of traps that can cause you to pay for months on a moderate discount today.