Store Credit Cards, Balance Transfers & More: Make the Smart Money Decision

Every day we’re faced with making decisions about our money. What feels like a smart money choice in the moment may have repercussions in the future. You might be tempted to save money on a purchase now only to have your credit score suffer.  You might choose to delay payments on a big ticket item only to face sky-high interest rates later.

Here are several choices you may face about how to spend or save your money, along with our advice on how to make smart money decisions.

Young woman giving her credit card for a contactless payment in the fashion store

Should I Apply For a Store Credit Card?

How many times have you been paying for a purchase and heard the question, “Do you want to apply for our store card and save 5% (or 10% or 15%)?”  What a tempting prospect as you watch the total rack up. But beyond the initial savings, do the benefits of a store credit card outweigh any potential drawbacks?

Pros of a Store Credit Card

“Member” Perks

If the store is one you shop at often, using a store credit card can be a good way to earn loyalty points or receive early alerts about store sales. This is a good way to save on future purchases or to save up for a larger purchase. However, continued alerts of sales and discounts, may entice you to make purchases that are not entirely necessary.

Builds Credit

If you’re trying to build credit, a store credit card can be a beneficial tool. Store cards have a less intense application process and can be easier to obtain than a card issued by a financial institution. Additionally, their low spending limit makes repayment easier. A history of consistently paying off your entire balance, on time, further strengthens your credit status.

Cons of a Store Credit Card

High-Interest Rates

Probably the biggest drawback of a store credit card is the incredibly high-interest rates they charge. Interest rates vary from mid-teens to close to 20%.  Often times stores will employ a “No interest for 12 months” promotion to further encourage enrollment.  But if you have not paid off your card balance by the end of the 12-month period, you’ll be strapped with even larger monthly payments once the interest kicks in.

If you don’t have the ability to pay off your total balance each month, opening a store credit card would not be a smart money decision.

Negative Impact on Credit Score

While store credit cards can help build credit, they can also have a negative impact. Your credit score is measured not only by the amount of debt you have but also the amount of debt you can potentially amass.  So every line of credit you open represents more dollars you could potentially have to repay.

Young Couple Shopping for a New Television Set in the Electronics Store.

Should I Purchase An Extended Warranty for a Big Ticket Item?

Are you eyeing up a new big screen TV? You’ve studied up on LED screens, 4K Ultra high definition, and Smart capabilities. You know these TVs inside and out. You’re completely confident in your purchase until you get to the checkout and the sales team member asks if you’d like to purchase an extended warranty. Now you’re frozen in a moment of panic. Should I purchase the extended warranty? Is it a waste of money? Am I a fool not too?

Extended warranties, or purchase protection plan, more often than not, do not give you any return on your investment.  Here’s why they may not be considered a smart money decision:

You’re Already Covered

Between store returns, the manufacturer warranty, and credit card purchase warranty, your purchases are already covered for major malfunction. Most stores allow you to return purchases within 30 days. If a problem arises after, the manufacturer warranty usually covers you for a year after purchase, maybe more. If you paid with your credit card it may also offer the benefit of additional protection, covering repairs or replacement for an additional year.

Consider Depreciation

Considering the life cycle of electronics and how quickly technology changes and updated versions are released, if your DVD player or laptop dies after three years you can probably replace it with the same model for less than the cost of an extended warranty.

Should I Choose Deferred Interest Financing?

We’ve all been there, you’re at a furniture or home improvement store and you’re faced with the question, “Would you like 15% off or six-month, interest-free financing on this purchase?”  You’re suddenly faced with a quick-decision that could put a great deal of pressure on your financial situation in the not-so-distant future.

Before you opt for the deferred interest option, consider this: one in five customers who choose deferred interest financing end up paying whopping financing charges on that qualifying purchase.

For deferred Interest financing to be the smart money choice, here’s what you need to know:

  • Make sure to evaluate your other fixed and variable monthly debts. What other bills come in each month?  Not sure, fill out a quick household spending plan to assess your financial situation.
  • Don’t spread yourself too thin financially. If the impending purchase cannot be held off and you can afford to pay out more to your store card in the coming months, than by all means move forward.  However, if you’ve got some wiggle room and can hold off to save some extra pennies to help offset the cost, that’s a great option too.

Young couple using computer for paying bills. They are having problems.

Should I Used a Balance Transfer to Pay Off My Credit Card Debt?

If you have succumbed to high-interest rate cards in the past, you could be feeling the effects in the form of a growing credit card balance. To bring down your debt, you might look into the option of a credit card balance transfer. It seems like an easy smart money decision, take your high-interest debt and simply move it to a low-interest card, but here’s some additional information on how balance transfers work.

Balance Transfers – The Good

Typical store credit cards can charge as much as 15-20% in interest, while a credit card from your credit union can offer interest around 6% (depending on your credit score.)  Often times credit cards from your financial institution or credit card company will even carry an introductory interest rate of 0% for balance transfer funds.

Suppose you were carrying a $5,000 balance on a credit card with 17% interest. If you paid a fixed payment of $300 per month, it could take up to 20 months to pay off that balance. Use an introductory rate of 0% and your debt could be gone in 16 months.

It’s easy to see how balance transfers work to help you pay off your debt a little quicker, but there are a few things to consider before jumping into a balance transfer credit card.

Balance Transfers – The Bad

There May Be Fees Involved

Check to see if a potential balance transfer card charges a balance transfer fee.  A typical balance transfer is fee is 3%. If you’re transferring a $5,000 balance, you’re paying $150 up front.

Introductory Rates Are Just That… Introductory

Read the fine print and don’t be fooled; that 0% rate is not going to stick around forever. In most instances, the introductory rate will be valid for 6-18 months.  At which point, your interest rate will jump to the issuer’s standard rates. Additionally, you want to be aware of any time limits for transferring your balance to your new card. In most instances, this must be done within the first 30 or 60 days of opening the card.

New Purchases May Not Be Interest-Free

Don’t use your 0% interest rate as an excuse to make a lot of high-end purchases. In many cases, the introductory rate only applies to transferred balances, while any new purchases will have the card’s standard rate applied to them.

Balance Transfer – The Ugly

Opening any new credit card is going to initially affect your credit score negatively.  But you can quickly remedy this by building a history of prompt payments. However, it becomes tempting to create a cycle of moving your debt balance from card to card. As one introductory rate expires, you simply transfer your balance to a new card with yet another promotional offer. This is how balance transfers work against you.

Not only does each credit card account hit your credit score, continuing to carry large amounts of credit card debt negatively impact you as well. In the end, your credit score may suffer to the point that you’ll no longer be approved for a new account and you’ll finally have to face your debt head-on.

Should I Be Using Prepaid Debit Cards?

There’s always a little bit of confusion surrounding prepaid debit cards. They aren’t credit cards, they’re more than gift cards, and they work a little bit differently than your bank’s debit card.

Very simply, once activated, prepaid debit cards can be loaded with money, by transferring money from a bank account or with cash, and you can use them at ATMs and for purchases anywhere you would use a bank debit card. When the funds on the card have been spent, you can reload the card with more money. But along with this ease of use, there come many problems with prepaid debit cards.

Fees, A lot of Fees

This is a stigma that has been tied to prepaid cards for as long as they’ve been around.  These cards charge a lot of fees, most of which you’ll only find in the fine print. Although your prepaid card may not charge all of these fees listed below, there is a good chance you’ll encounter some of them:

  • An initial setup fee
  • Monthly maintenance fees
  • Fees for using an ATM
  • Fees for reloading money onto the card
  • Fees for checking your balance

On the bright side, as more competitors and major financial institutions begin offering their own prepaid debit cards, fees have declined in response to the additional competition

Overdraft Protection

On the surface, this may actually seem like a benefit.  Your purchase is more than the remaining amount on your card, so the card provider covers the gap amount.  However, you are charged for this protection service, typically $15 per incident plus the amount you were short for your purchase, and you can quickly get you into trouble if you don’t keep a good record of your card’s current balance. Fortunately, overdraft protection, in most cases, is an optional service and can be avoided completely.

No Loss/Theft Protection

Unlike losing your bank debit card or credit card, you don’t have the same level of protection.  You should contact the card provider immediately, but each provider and each type of card is different when it comes to your rights to recover the money remaining on the card.  A good tip: unless you have a big ticket purchase in mind, don’t load your card with too much all at once.

However, there are a few instances where using a prepaid debit card could be a smart money decision.

  • Prepaid debit cards are on the rise with parents who are teaching their teen children or college students some early lessons about money management.  Parents can upload a monthly “allowance” to the card for their child to use for personal spending.  Using a prepaid card with a set limit, their child soon learns to budget and manage their money to last the entire month.
  • Prepaid cards are a great tool to use when shopping online.  Because they have only a finite amount of funds tied to them and do not provide access to any bank accounts, there is little damage done to your finances if the card information is stolen online.
  • When you’re trying to stick to a budget, a prepaid debit card can be a helpful financial tool.  You’re only able to spend the amount of money loaded onto your card, ensuring you won’t go over your spending plan.

Are there other financial decisions you’ve been faced with lately?  Did you make the smart money choice? Tell us about it in the comments below.

Liz Oliver
Liz Oliver

Liz Oliver is the Member & Loan Services Officer at Lancaster Red Rose Credit Union. She’s been a member of the LRRCU team since 2007.

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