The holidays are quickly approaching! That means we should all be prepared for an inundation of store credit card offers every time we make a purchase. While the discount these cards offer can be quite tempting, high interest rates and clever marketing could throw you into debt that you’ve spent the whole year working so hard to avoid or pay off. So before you sign up to save 20% on that vase for your great aunt Edna, take a minute to read these tips on how to approach store credit cards responsibly.
The Dangers of Store Credit Cards
The situation usually plays out like this: you’re getting ready to make a purchase and, since it’s the holidays, the purchase could be a much larger a purchase than you’d normally make. Then the sales associate talks about how you can save 10%, 15% or even 20% on your purchase today by signing up for their store card. He or she also reminds you that you could get a discount on your birthday, coupons throughout the year, etc. The extra savvy sales associate even tells you not to worry – you can pay off the card when you get your bill and close it right then. What do you have to lose?
A lot. Unless you can make a payment on the new card right then and close it out immediately (very unlikely), then your resolve to close the card could waver as the weeks go by. In fact, by the time you get your card you may have forgotten you even signed up for it. At that point you figure, might as well keep it. Then the coupons start coming.
Once you have coupons, you’ll find reasons to utilize them – you wouldn’t want that savings to go to waste, would you? There’s one problem with this: unless this is a store that you literally need to shop in several times per year, all the coupons do is get you in the door when you otherwise wouldn’t have thought to shop at the moment. It’s not really saving if it causes you to spend money you wouldn’t have spent otherwise.
And so it goes on and on. But you don’t just lose money from shopping more frequently. If you carry any debt on that card then you’ll pay a great deal more on interest than you would on any other type of debt. Store credit cards come with an average whopping 24% interest rate. That’s average. Which means your interest rate could be even higher!
How to Handle Store Credit Card Debt Responsibly
If you’ve already obtained a store card (or several) – or if you can’t pass up the discount, then you do have the power to utilize the savings responsibly. This requires fast action and vigilance. Here’s how you can handle a store credit card responsibly:
If you already have debt on a store card, then that card (or cards) most likely has a higher interest rate than any of your other debt accounts. Therefore you should prioritize paying that debt off first, regardless of the balances of your other debt.
If you’re signing up for a store card to utilize a discount, then make the payment right after your purchase while you’re still at the sales counter. Most stores allow you to pay your bill at the counter instead of just over the mail and online, which means you can whip out your debit card right then and pay off that balance just like you would if you made the purchase in cash.
Once the balance is zero, close the card. Coupons are nice, but they’re not worth high interest rates and more temptation to shop. So once the card comes in the mail and/or the balance is at zero, close the card and forget it ever happened. Chances are you will have to call the retailer to close your card, although it doesn’t hurt to check online to see if they offer the option there. Be prepared – they may try to prevent you from closing it but stick with it if they do. They legally have to close any card that you no longer want open as long as there’s not a balance.
The holiday season is a pressure cooker for finances. Stores have to work to outperform each other and their own numbers from previous years. Consumers feel the pressure to buy gifts that make their loved ones feel appreciated – spending more in one month on shopping than they likely do the whole year. This pressure cooker is what makes store credit cards so appealing to stores and consumers – stores know they can get more out of consumers from the debt and future purchases and consumers want to save as much money as possible during their holiday shopping spree. But now that you know the dangers of store credit cards, don’t let the pressure boil your finances.
Image Credit: Mr. T in DC