How to Avoid a Gift-Giving Hangover
Falling for retail store credit card deals can be an expensive mistake
December is hands-down the trickiest month to stay out of cash-flow trouble. Depending on how long your gift-giving list is, holiday spending can put a serious dent in your household finances.
And that can make it hard to avoid being suckered in by what seem to be alluring offers for store credit cards. You know the deal: Whether you are shopping old-school or online, when you get to the checkout you are offered the chance to save 10% (or more) or earn some rewards points, if you sign up for that retailer’s credit card. And the cash-back or rewards deals can indeed look great.
But only if you pay your bills in full each month.
If you have any inkling you will not be able to pay off the bill pronto when the statement hits your inbox, you really don’t want to use a store-issued card.
Creditcards.com reports that in 2019, the average APR on store credit cards is 27.5%. That’s far higher than the typical interest rate on a “regular” Visa, Mastercard or Amex Blue card. The average interest rate being levied on people with a credit card balance these days is under 17%. That’s bad; 27.5% is just ridiculous.
Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest provided by Rate.com
If you ran up a $1,000 gifting balance on a credit card that charges 27.5% interest, you would shell out $155 in interest payments if you managed to pay off the tab in 12 months. That’s effectively increased your holiday spending by 13%. Even if you hustle and get it paid off in six months, you’ll still pay more than $80 in interest.
The problem with zero-rate deals
It can get even worse. A popular offer from many retailers is to dangle a “zero-interest” deal in front of shoppers who put a purchase on the store card. The prospect of being able to buy today and not owe any interest for six months, 12 months and sometimes even longer is enticing. The Amazon Store Card offers zero percent financing for up to 24 months
A recent WalletHub survey found that the prospect of 0% financing is the biggest draw in getting consumers to sign up; six in 10 people cited the 0% deal compared to 41% citing getting a discount on their first purchase.
If you can manage to get the bill paid off during that grace period it can indeed be a sweet deal. But you need to be aware of what happens if you don’t get the balance paid off.
According to WalletHub, nearly 90% of “zero-rate” offers are in fact “deferred interest” deals. That means that once the grace period is over – or if you don’t stay current on your monthly payments – the retailer will charge you interest retroactively on your original purchase price. Not your current balance, but your original balance.
Not all retailers use the deferred interest method. Target, Costco and Kohl’s don’t. Amazon, Best Buy, Home Depot, Pottery Barn and Bed Bath & Beyond do, according to WalletHub.
At a minimum, if you want to take the zero-interest bait, read the fine print and understand what happens if you slip up on payments, or still have a balance after the interest-rate grace period ends. If you are staring at a potential interest rate charge of 20% to 27%, you really need to be extra careful you get the tab paid off ASAP.
If you ever find yourself stuck with a high-rate credit card balance, you obviously want to hustle to get it paid off. If you happen to have a solid emergency savings fund, this just might qualify as an emergency.
You don’t want to deplete your emergency fund, but if you have more than three or so months of living costs set aside, you might want to consider using some of the money to get rid of a high-rate debt. Of course, this only makes sense if you are determined to not run up another balance you can’t pay off. If you have an over-spending issue, throwing savings at it is not a solution, but only a temporary fix.
Taking on gig work is another way to come up with extra cash fast. Or perhaps you received some gift cards over the holidays? You can check online for services that offer to buy your card –at a discount, of course – and hand you cash. Admittedly, that’s not exactly in the holiday spirit, but nor is being saddled with very expensive, deferred-interest credit card charges.