11/20/2012 5:15 PM ET|
How to size up a store credit card
Understand 0% financing terms
One common deal attached to these credit cards is an offer of 0% interest for an initial period, provided you use your card to buy a certain amount of merchandise for that period -- for instance, putting $500 on the card within the first six months.
There are a few things to look out for with one of these deals. The most obvious is that you don't want to put yourself in a position of needing to buy merchandise you don't need just so you can put off paying interest. And you should also make sure you establish whether you need to make minimum monthly payments during that time.
More important, though, is that the balance may be accruing interest in the background during that six-month period.
"You won't have to pay any interest if you pay off the purchase in full in the period," says Kathleen Day, a spokeswoman for the Center for Responsible Lending. "They're just hoping you'll forget, at which point you have to pay all the interest (you've accrued)."
If you play your cards right, it’s essentially an interest-free loan. Take the Home Depot card, for instance, which charges no interest if you spend at least $299 in a six-month period and pay it off in full.
But as the card's terms make clear, if you goof and let the interest-free period expire without paying up (or if you miss a minimum payment), you'll suddenly get hit with six months' worth of interest. And as Day notes, the interest rate on that balance is often higher than what you'd pay on your normal credit card.
Make sure it's a credit card
Not all retailer cards are of the credit variety. Sometimes they're actually debit cards, and that means a whole different set of conditions in thefine print to pore over.
Take the case of Jamie, whose story was told at Credit.com. Jamie took out a Target-brand debit card, which was linked to a checking account and offered 5% cash back when used at the retail chain. Unfortunately, she didn't realize that the cardholder agreement automatically signed her up for overdraft protection, and when she used it without enough money in the bank, she wound up with a $30 insufficient funds fee.
Because the card was issued by a retailer rather than by a bank, federal laws didn't prohibit Target from automatically signing her up for the service. The lesson? Whether the store is issuing you a debit or credit card, read the cardholder agreement carefully.
Of course, that's not always easy to do when you have impatient shoppers waiting in line behind you at the store, which is why Detweiler says she isn't crazy about signing up for cards at the point of sale.
"I'm not a fan of opening store cards on the spot, because it just doesn't give you time to think through terms of the card," she says.
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