Friday, August 8, 2008

The perks (and downfalls) of retail credit cards

'Tis the season to shop ... wait, isn't that every season? And with shopping comes the most-asked question by sales clerks and store merchants alike: "Would you like to put this on your _____ card?" (Fill in the blank with Bloomingdales, The Gap, Banana Republic, Macy's, Nordstroms, Target, or any other store you happen to be frequenting at that very moment.) Oh, there's also the addendum to this commonly asked question, the one I like to call the make-it-seem-like-you're-getting-a-great-deal-on-your-purchase inquiry after you answer "no" to the first question: "Would you like to save 10% by opening an account?

Now I get that a lot of the sales associates or cashiers that help me don't want to ask these questions. Many times they ask with the enthusiasm of someone who's just found out they need to get another cavity filled, so I understand that it's all part of the job requirement (hey, I worked enough retail in high school and college to know the ins and outs.) But it's the premise of the situation that irks me to no end. If I wanted a retail credit card, I would ask to sign up for one! Not that that there's anything inherently wrong with these cards. In fact, if you do a lot of shopping at a place such as Target, and you normally use Visas or Mastercards to fall back on for purchases (tsk, tsk, read this for why that's not the greatest idea!), then you may as well sign up for a store-issued card, right?

Consider this: You're click-clacking around your local Macy's in your new heels and outfit, looking for a necklace that would complete your look. You spot a tres cute Givenchy crystal necklace, price tag: $80. Now what you'd love to do is pay with your debit card, but it's near the end of the month when bills are starting to add up and, frankly, you don't want to risk cutting into the cash cushion you have in your account. You try walking away. You even get as far as the perfume counter, but something keeps pulling you back. You spritz yourself idly with the latest perfume, and eye the sparkle of the necklace under its spotlight across the department store floor. In the span of 25 minutes, you've already thought of other "perfect" outfits that would go with your impending purchase. Having no cash is not an excuse, and you can't fight it any longer. Yes, you may have only layed eyes on it 30 minutes ago, but you already know that you must have the Givenchy necklace. You're only option is a credit card.

In true choose-your-own-adventure form, you have two choices: you could charge said necklace to your Mastercard (through Capital One, for example), which comes replete with a $39 annual fee and an 8.65% APR, or -- at the urging of the pushy saleswoman -- you could open a Macy's credit card, which saves you an extra 15% on your necklace, comes with no annual fee, but is saddled with a breathtaking 22.9% APR. So what should the shopper on a budget do at this juncture of her journey (besides put the necklace down and come back when she has the cash)?

With the Mastercard, the interest rate would cost you another $7 on top of the $80 price tag. There is an annual fee with this one, but I'm assuming you're putting more on your card for the year than just a necklace, and so, the annual fee isn't too bothersome in this instance. There are many Visas and Mastercards that also come with no annual fees.

The Macy's credit card is more enticing though, with the scent of the 15% off deal wafting upward from the open credit application, beckoning you to sign your name on the dotted line ... but wait! Fifteen percent off of $80 is $68, so saving $12 is great until that 22.9% APR pops that $68 price up to $83.57. Yes, that's right. You'd be spending an extra $3.57 on the necklace, so really, how much of a deal is it?

There's a small number of you who may pay back your Macy's card in full at the end of the month, evading any sort of nasty APR and therefore utilizing the 15% off the way it was intended to be used. But let's get serious, if you're charging various things, the chances of you paying back your balance in full every month is probably slim. And if you're a teensy bit late one month with paying your bill, Macy's charges you a higher APR of 24.9%. Stop gawking, you read that right!

So with a significantly higher APR as just mentioned, what are the perks to carrying retail credit cards? Well for starters, they are one of the easiest kinds of credit cards to get, meaning that if you want to build your credit, you shouldn't really have a problem opening one. In fact, according to FinanceGlobe.com, you need "fair credit" to qualify for a Macy's card. I don't know whether to be amused or scared that it's that easy for unsuspecting people (who probably have "fair" bill-paying habits to begin with) to get lured into falling into a deeper credit spiral.

Another plus with retail cards is that many have adopted "reward" systems, where you if you spend a certain amount of money, you get a $50 gift certficate, for example, or with every dollar you spend, you get $0.05 back in the form of a gift card at the end of the year. You get the picture. (Love and I have a Nordstrom's Visa card and with every certain amount of dollars we spend, we get $20 gift certificates in the mail to use in-store or online.) At the same time, though, many regular Visa and Mastercards offer similar reward programs, with airlines miles and the like, so this isn't as much of a specific perk as it is keeping up with competition. Sometimes stores have special discounts, such as an extra 10% off, if you charge your purchase to your card, but this yet again introduces the problem of that horrible 20+% APR they conveniently don't remind you about.

The Achille's heel of signing your soul away to the nearest Banana Republic is what I've been discussing this whole time: the humongously inflated APR rates. 22.9%. Really? As a budding financier, you know better than to even get near such a thing. As I mentioned, the fabulous discounts you may initially get don't matter if you can't pay your balance off on time every month; the finance charges are sure to drown out any semblance of a good deal over the long term.

Also be careful of opening too many cards, regardless of how enticing (and misleading) the initial deals are. With the more lines of credit you have open, not only will credit companies see you as more of a risk because of your 18 different cards, but it's also easier to slip up and have them negatively affect your credit history.

These are all important things to remember the next time you haul your stash up to the check out and get offered a seemingly wonderful perk or three. It's especially important when you're in the market to buy a more expensive item, such as a sofa or a mattress set, which can cost upwards of $400 or $500. Many stores feed off the fact that we like to shop and we live for finding a good deal, but I hate getting taken advantage of and don't like seeing others get duped either. Next time you're faced with a new retail credit card application, carefully step back and weigh your options. In many instances the cons end up costing you more money if you haven't done your homework!

4 comments:

Abby said...

Hi there,

Interesting piece -- and certainly I like the tone -- but your math is different from mine.

(I mapped mine out in excel because I'm a total nerd.)

I did the first (Macy's) card at 22.9%, assuming you only make the min payment of $20.

That means the first month you start with $68, pay $20, have $48 left over, plus interest of $1.30 ($48 * .0229/12 months). So your new balance is $49.30. Do this for Months 2&3 and you just pay the $10.82 leftover for Month 4. That means the necklace is still only $70.82 ($20 min payments times 3 months, plus the last $10.82.)

But with the 8.65% card, you start with $80. You have much lower interest (under a dollar each time) but end up paying $81.46.

So the store discount still works in your favor. Not to mention that credit cards nowadays use the slightest provocation to raise your rate. So while you may get that Capital One for its low rate, there's a good chance it will hike up to a Macy's-like level unless you're completely meticulous, never go on vacations or have family emergencies, and never ever carry a balance.


At any rate, I agree that people should be wary of too many store cards. I am going through and canceling a bunch I no longer use because I, too, got swept up in the "10%? why I'd be losing money *not* opening the card" craziness.

That said, I love love love the extra savings my husband and I get with our Macy's card. We saved a ton when we had to buy warm-weather clothes for our honeymoon. (I had only one pair of shorts, and I thought that pants might make Orlando in May rather unpleasant.)

Of course, that leads to a new problem: Getting things *because* you can save money with your card. An eerily easy-to-rationalize phenomenon

Jeremiah said...

Abby is definitely right about calculating the interest on one purchase overtime (when small); however, there is one caveat: how many of you out there don't actually carry a balance on your rotating retail credit cards? (not to mention at $68 a minimum payment of $20 is way off - the going rate for CC payment calculation is double the interest charged for that period) That's what I thought. As most of us get suckered into purchasing those extra jeans/sweaters/t.v./whatever-else-you-want-at-that-moment, that 10% off one time (or multiple times at every sale for that matter) equates to nothing more than a hook to snag extra revenue off clothing sales that are already marked up over 200% from distributor costs (sometimes more depending on the brand).

Also, as purchases get bigger and bigger - as they often do when you get any percentage off; that GIANT APR sneaks up on your wallet and absconds with your hard earned pay. Take Gucci's latest. At $1200 it packs quite a punch; but, you can get it at just $1080 with that Macy's card!!!! (strangely more and more people are buying these on credit, hence the example). Well, over time that baddie will rack up either over $1700 on your Macy's card or just over $1500 on your CapOne. So much for 10% off. Of course neither of these options compare to paying cash, but it is a good illustration of how things can just sneak up on you. (Check the math in Excel (principle*((0.229/12)+1))-payment(around 40 as per my min on over 1k balance) rinse and repeat).

So, while Abby's excellent spreadsheet does show that small purchases on high interest rate cards at a slight discount may be better; the higher the purchase price (think that new Gucci hand bag you've always wanted . . . and at 10% off!!!) or carrying a balance quickly decimates any 10% sales pitch at pick-your-poison retail store.

Kudos to both Abby and "B.o.B" for enlightening us on the intricacies of credit card belles (mispelling intended for you savings ladies) and whistles.

PS - one more thing . . . pay your bills on time (or at least negotiate with the CC co. if you're going to be late - believe me they understand).

Crystal said...

You both have a point about the math, I guess I should have used a more expensive example to really show what I meant about the merits (and otherwise) of retail credit cards. The most important thing with any credit card (especially retail cards!) is to be careful of being lured in by "fabulous" discounts. The deals encourage you to buy more to "save" more, which errodes your ability to focus on what you really need versus what you want just because it's on sale.

Abby said...

I agree with both of you -- there's a ton of factors that go into these. It's all about keeping you confused and keeping the money coming in.

I realized after the post that i hadn't even remembered to take into account the billing cycle that most cards now use:

From the time you don't pay off a balance completely until the time that you get the balance to zero for two months straight, you are usually billed based on your daily balances.

Obviously, this favors bigger credit cards. Even if, every month, you pay $1000 of your $1500 card, the increasing balance is compounding daily.

It's one reason my husband and I made semi-monthly payments when he was paid every two weeks. Now that he's on unemployment, we pay each week. Obviously we also try to avoid putting things on the credit cards. But at least this way, when charging is necessary, the balance is paid back down as quickly as possible.

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