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Cashback & Rewards credit cards: a much better option than credit cards issued by department stores

Typically, when one approaches the cashier of a department store or retail store, they are given the opportunity to instantly apply for a store-issued credit card. The pitch is that upon approval, the customer will receive 10% off their current purchase using their new card. Everyone benefits from the savings, so many people immediately bite into this offer. The problem is that these unique and tantalizing savings block the consumer’s best judgment. Few people ask about the introductory APR on the card. If they do, the seller rarely knows. Usually, the APR on store-issued credit cards starts at 21.99-23.99%. This APR is reserved for people with good credit. Introductory APRs on in-store credit cards can start as low as 28.99%!

This is how the store benefits. They issue a card immediately without having to spend money on advertising to win over a candidate. They immediately reach a balance on the card that has a high APR. They also encourage the consumer to return to the store because they carry their card. In addition, these cards can be used to make online purchases or catalog purchases over the phone. Their only loss is 10% of a purchase which they will more than double every consumer over time.

Let’s say you are a responsible person. You want the 10% savings, so you think you’ll use the card, immediately pay the balance in full, and never use the card again. It seems like a legit thing to do, but it has a few flaws. You benefit from an immediate refund of the balance since you have just saved 10%. True for the short term. In the long run, you may run into problems. It would be unwise to cancel this card immediately after paying off the balance, as it would appear as a closed account on your credit report.

Closed accounts on credit reports are considered negative by lenders. So now you’re stuck with a credit card that you won’t use because the APR is too high and it doesn’t come with a long-term rewards program. You will likely receive periodic credit limit increases over 9 month terms, especially if the lender finds that the account has a zero balance and no past due payment history. Each credit increase will directly affect your potential debt. Thus, potentially hampering your credit card approval potential on the cards you will actually use. Is it worth the initial 10% you saved?

If you want to save money on your purchases, there are far better alternatives than store-issued credit cards. One option is to apply for a cashback credit card. These cards are issued by major issuing banks and usually come with a low APR on purchases and balance transfers. Recently, Chase Manhattan Bank replaced its Chase Cashbuilder card with the Chase Cash Plus Rewards Visa. This card has an introductory APR of 0% on transfers/purchases, no fees, and a variable APR of 12.99% thereafter. You can earn up to 5% cash back on your purchases or choose from a variety of different rewards, such as travel and merchandise. The savings from using this card or other similar offers wisely are far more lucrative than a one-time saving of 10% on a purchase.

There are other specific rewards programs available. Chase also issues Disney, Starbucks, Borders Books & Music and Avon visas. Citi issues a Home Rebate Mastercard with mortgage savings and a Upromise Mastercard with future tuition savings. All of these come with lower APRs than store-issued credit cards.

Another thing to be wary of is gasoline reward cards issued directly by gasoline merchants. These credit cards usually come with a high APR similar to credit cards issued by department stores and retailers. If you want to save money on gas, many banks now offer gas reward cards. Chase currently offers Hess Visa and the Chase PerfectCard (which offers cashback on gas purchases), while Citi has just launched its Shell Mastercard. Applying for these cards from banks rather than merchants will result in greater savings and lower APRs.

Beware of signing up for a merchant-issued credit card. Read the print found and ask as many questions as possible before enlisting. These decisions can affect both you and your credit for longer than you think.

© Credit card point of sale

By Russ Nauta

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