The Retail Credit Card Trap

by Meghan

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“Would you like to save 10% off your purchase today by opening a credit card with us?”

How many times have you been asked this one?  Sometimes it also comes with the promise of regular coupons, or an even steeper upfront discount, making it all the more tempting.  With Black Friday upon us, I thought I’d cover the Retail Credit Card Trap as our first Financially Savvy Friday post.

The best answer to these offers is almost, universally, always – “NO, thank you!”  I usually follow it with a, “I’d get in more trouble with my husband than I already am!” to lighten the mood after the rejection.  The truth behind these offers is unless you plan to pay off each and everyone of these cards the second that first bill is due, they are never a good deal for the consumer.  For the cashier, they are great – they often receive spiffs (or Sales Performance Incentive Funds) for getting a customer to sign up for one, usually $2-$5 per new card.  For the retailer, they are great too – you likely will buy more than you otherwise would have since you are saving some money today and don’t have to pay for it right away.  But the best deal goes to the bank financing the credit card.  According to Bankrate.com, current credit card interest rates are more than 13%, with variable rate cards even higher at nearly 16%, far greater than that upfront 10% discount being offered on your purchase.  And those are just the average – these interest rates, depending on credit history, can range from 7% up to 36%!

To make all this math a little easier to understand, let’s walk through an example with real numbers.  Today, you go shopping at The Gap, purchase $200 worth of merchandise and agree to open up a credit card, saving 10% on your purchase today, putting a balance of $180 on your brand new card.

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Your APR, annual percentage or nominal annual interest rate, is 15%, and the minimum monthly payment is $25.  To determine your monthly interest charges, your APR is typically divided by 360, creating a daily rate, which is then compounded daily.  If you only make the minimum monthly payment each month, it will take you 8 months to pay off your initial purchase, with total payments of $188.66.  While you still saved a little off your initial $200 worth of merchandise, you didn’t quite save that full 10%.

Now, let’s say, you signed up for a few of these cards, and don’t keep track of all the payment due dates.  Or you go on vacation or are traveling for work and are late on a payment one month.  Most of these cards will charge an automatic $25 late fee, and some will also automatically dramatically increase your APR.  Let’s say you make one late payment, and only get hit with the $25 late fee.

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You’ve now extended the payoff time to 9 months and added $25 in late fees, making your total payments increase to well over $200.  This eliminates any upfront savings you received for opening the card in the first place, and in fact, made that purchase cost more than the value of the total merchandise.

Don’t get me wrong – credit cards are not all bad, and can be useful in tracking spending and managing your monthly budget.  But the fewer, the better, and pay them off every month!  Don’t be seduced by the Retail Credit Card Trap.


Disclaimer: This post is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. The information contained in or provided from or through this forum is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The information provided is general in nature and is not specific to you or anyone else. YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS SITE WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR. You understand that you are using any and all information available on or through this site AT YOUR OWN RISK.

 

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