When "Real Housewives of New Jersey" star Teresa Giudice and her husband filed for bankruptcy in October, it wasn't the $2.6 million owed on eight mortgages or $12,000 in unpaid fertility treatment bills that caught our eye.
It was their $104,000 of credit card debt, including $20,000 owed on store credit cards to Bloomingdale's, Neiman Marcus and Nordstrom.
Ask anyone who loves to shop and they'll tell you that store credit cards can get you into big trouble if you're not careful. We don't mean the co-branded store cards with Visa or MasterCard, but those proprietary credit cards that can be used in one store or a cluster of stores owned by the same company.
"Typically the interest rates on store cards are horrendous," says Michael Kay, president of Financial Focus, LLC, a certified financial planning firm in Livingston, N.J. For example, a quick look at Ms. Giudice's retail card APR portfolio:
- Bloomingdale's: 24.50% APR.
- Neiman Marcus: 23.99% APR.
- Nordstrom: 10.90% to 22.90% APR (rates vary depending on your credit history).
Uber-luxury stores aren't the only ones with high rates -- the Gap card is 22.99%, Macy's is 24.50 percent and Victoria's Secret clocks in at 24.99%. As of Aug. 3, the national APR average for regular credit cards is 14.44%, according to CreditCards.com Credit Card Rate Report.
But when used correctly, store credit cards can get you big discounts, earn you reward points for gift certificates, stock you with coupons and provide short-term financing on major purchases
Here are six tips on how to use store cards the right way.
1, Do your homework.
"If you didn't go out with the intention of 'I'm looking to open a credit card today,' don't impulsively do that," says Todd Mark, vice president of education for Consumer Credit Counseling Service of Greater Dallas.
Just as you would when signing up for any other credit card, get the terms -- don't just settle for what the salesperson tells you while you're checking out. What's the APR? Is there an annual fee? Is there an introductory zero percent interest period? What happens if you miss a payment? If you're making a big-ticket purchase, such as electronics or furniture, see if the store has a financing option. You might get a better deal with a lower interest rate than by opening an credit card account.
2. Look at all the benefits.
A lot of store cards will offer a discount on your first purchase, but the real winners are cards that offer continued savings. If you have a store card for the Gap, Banana Republic or Old Navy, you get 10 percent off on Tuesdays at all three stores, in addition to earning points toward gift certificates. Victoria's Secret cardholders can access sales before non-cardholders and are sent birthday coupons. JJill cardholders get 5% off all purchases all the time, plus free gift packaging on catalog and online orders.
Compare the benefits with your regular credit card, too. Can you earn better rewards from that card that can be used almost anywhere?
3. Pay off your balance before any interest kicks in.
We say this with all credit cards, but it's especially crucial with store cards as the APRs are so high that you can wipe out any discount or rewards in just one month if you carry over any balance. If you can't afford to pay off the amount every month, don't use the card.
4. Use them as a short-term loan -- but with a payment plan.
Leah Ingram, author of "Suddenly Frugal: How to Live Happier and Healthier for Less," opened a Lowe's credit card when she bought new kitchen cabinets. The card offered zero percent interest for six months.
"Go into it with your eyes wide open and with a payment plan in mind so that by the time you might be paying these finance charges and high percentage rates, you've already paid it off," she says.
You'll typically find this kind of financing on store cards from places where you'd make a big purchase. Best Buy, for example, offers no-interest loans storewide on purchases of $249 and more on its store card -- if you pay off the balance in 18 months. As for no-payment, no-interest deals, they're gone as a result of the Credit CARD Act. Cardholders have to make monthly payments on no-interest promotions now.
5. Throw out your coupons -- unless you're shopping there anyway.
"If you're trying to live on a budget, yes, you want to get what you need for as cheap as possible, but you don't want to get to the point where you have a percentage-off coupon burning a hole in your pocket and you spend money you shouldn't spend just because you can get a discount," says Ingram. Another question to ask yourself: If you had to pay cash, would you still buy it? If the answer's no, then move along.
6. Take a walk.
"There's plenty of point-of-sale incentives that make the shopper likely to make bad decisions," says Kay. Plus, store employees often get incentives for signing people up for their store's credit card, or they must make a quota of new sign-ups.
Don't let a hard sell force you into a store card decision until you've mulled it over. If that means walking out of the store, do it. It might be a minor inconvenience to come back the next day, but it'll save you a world of hurt by making the right financial move.
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