Cashback and Rewards Credit Cards: A Better…

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Typically, when someone approaches the register at a department or retail store, they will be given the opportunity to apply for a store-issued credit card right away. The pitch is that upon approval, customers will receive 10% off on their current purchases using their new card. Everyone enjoys the savings, so many people snap up this offer right away. The problem is that this tempting, one-time savings blocks better consumer judgement. Some ask for information about the introductory APR on the card. If they do, the seller rarely knows. Typically, APRs on store issued credit cards range from 21.99-23.99%. This APR is reserved for those with good credit. Introductory APRs on store credit cards can start as high as 28.99%!

In this way the shop benefits. They issue cards immediately without spending money on advertising to get applicants. They quickly get the balance on the card with the higher APR. They also ask the consumer to return the card back to the store as they are the bearer of their card. Plus, these cards can be used to make online purchases or catalog purchases over the phone. Their only disadvantage is 10% of the purchase which they will more than double from each consumer over time.

Let’s say you are a responsible person. You want 10% savings, so you think you’ll use the card, pay off the full balance right away, and never use the card again. It seems like a valid thing to do, but it has some flaws. You benefit from paying off the balance right away because you’ve just saved 10%. True for a short time. In the long run, you may run into problems. It would not be wise to cancel this card directly after paying off the balance as it will appear on your credit report as a closed account.

Closed accounts on a credit report are viewed as negative by lenders. So now you are stuck with a credit card that you won’t use because the APR is too high and it doesn’t come with any long term rewards program. You will probably receive periodic credit limit increases over a period of 9 months, especially if the lender observes that the account has zero balance and no outstanding payment history. Each credit increase will directly affect your loan potential. Thus, potentially hindering your ability to get credit card approval on cards you don’t actually use. Is it worth the initial 10% you saved?

If you want to save money on purchases, there are much better options than store-issued credit cards. One option is to apply for a cashback credit card. These cards are issued by major issuing banks and typically come with low APRs on purchases and balance transfers. Most recently, Chase Manhattan Bank replaced its Chase Cashbuilder card with the Chase Cash Plus Rewards Visa. This card has intro 0% APR on transfers/purchases, no fees, and up to 12.99% variable APR thereafter. You can earn up to 5% cashback on purchases or choose from a variety of rewards like travel and merchandise. Saving by using this card or other similar offers wisely is much more attractive than saving 10% outright on purchases.

Other exclusive rewards programs are available. Chase also issues Disney, Starbucks, Borders Books & Music, and Avon Visa. Citi issues a Home Rebate MasterCard featuring mortgage savings and a Promise MasterCard featuring future savings on college tuition. All of these come with lower APRs than store-issued credit cards.

Another thing to be aware of is that gas rewards cards are issued directly from gasoline merchants. These credit cards typically have higher APRs similar to department store and retail issued credit cards. If you’re interested in saving money on gas, many banks now offer gas rewards cards. Chase currently offers the Hayes Visa and the Chase Perfect card (which offers cashback on gas purchases), while Citi just launched its Shell MasterCard. Applying for these cards from banks instead of merchants will net you more savings and a lower APR.

Be wary of signing up for any merchant-issued credit card. Read the search print and ask as many questions as possible before listing. These decisions can affect both you and your credit for longer than you think.

© Credit Card Outlet

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