Monday, November 19, 2007

How To Lose At Five Card Draw

So much for those annoying commercials that tell us credit cards are the only way to keep the checkout line moving quickly. Shane came home from one of the nationally-known department stores Saturday, telling me about the woman in the checkout line in front of him.

He said the total of her purchases was around $225, and she wanted to put them on her store credit card in order to get a 10% discount, which would amount to about $22. However, the total would have put her above the limit on her store card.

Still wanting that discount, she decided she should by a gift card for $225, then use the gift card to clear enough of the balance on the store card for her new purchases.

She tried to pay for the gift card with a major credit card, but it was denied because it was full to its limit. She tried a second major credit card, and a third, both of which where maxed out.

Instead of being embarrassed, or deciding to NOT make the purchase, she pulled out a “brand new” credit card, used her cell phone to call and activate it, then finally completed her purchase.

Now, I don’t know what kind of interest rates she’s paying on her cards, or the balances she’s carries. I could be wrong, but it seems very likely that she isn’t paying them off each month, either. (I can't say much about that, though, since we're carrying a balance right now.) I’m not going to attempt to calculate the actual interest fees on this complicated transaction, but it seems obvious that it’s a losing proposition.

Interest on store credit cards runs pretty high; I did a little research on this one and it appears that it may be 20% or more. So, while she “saved” 10% on the purchase by putting it on her store card, if she doesn’t pay it off within a month, she’ll be charged 20% on $225. She probably does quite a bit better on the brand new major credit card; I'll estimate an interest rate of 5%. But if she doesn’t pay it off within a month, she’ll pay another 5% on the $225 gift card purchase.

She’d have been better off forgetting about the discount and just putting Saturday’s purchases on the newly activated major credit card. Or, of course, paying cash.

Then again, if by chance she DOES pay off all of her credit card balances each month, then she actually saved a few bucks. But I seriously doubt that’s the case. And even if it is, it seems like a lot of trouble for the amount saved.

I suppose I shouldn’t worry about her. If she runs into trouble getting everything paid, I’m sure she can always get a side job as a juggling act.


Becky..Absent Minded Housewife said...

When I was in Sam's Club yesterday I was offered a free blanket for signing up for a store credit card. I jokingly asked the kid making this offer if it would just be easier to snatch the blanket out of his hands and run screaming out of the store. He laughed and said, "So that's a no?"

Annie Jones said...

That would be the only way to really get it for free, I think.

ajooja said...

Yeah, credit cards suck. I've been on every side of it and I still have nothing meaningful to add. It just sucks.

Annie Jones said...

Ajooja: I guess it's not the card so much as the debt, but the first usually leads to the second.

Once we get our (one) card paid off, we'll probably hang on it to it as a tool to make it easier to rent the infrequent motel room and even less frequent rental car. We can do most of that with our debit, but occasionally there's one that's a stickler for an actual credit card.

DadGuy said...

Yeah, chances are that this lady is paying the minimum on her credit cards. Which is kind of too bad, but I guess those credit card companies make a pretty good living just via the transaction fees, so anything over that is just a bonus to them. It scares me how many people do that though. What happens when your credit line runs out?

Donna said...

Credit cards ARE tools. If used correctly, they can and do make shopping much easier. But 'cha GOTTA pay off the balance each month or play the "pay me interest" game with the CC companies. No thank you! I have 2 cards...Zero balances....Ahhhhhh

Annie Jones said...

Dadguy: On further discussion with Shane, I found out that she used the new card to clear the entire balance of her store card, which he said was in the $850 range. Which further indicates to me that 1) she's probably just paying the minimums and 2) she's going to run that store card right back up to the limit.

She's not using her cards...they're using her, it seems.

Donna: I guess at their inception, they were "charge" instead of "credit" cards, and all worked like American Express, requiring balances be paid in full every month. Somewhere along the way, some company must have realized they could make a lot of money by making them "credit" cards. Personal finance would be a very different beast if that hadn't happened.

Dave Morris said...

It slays me when the commercials come on that portray those who use cash to be "uncool." No wonder Americans are in debt to their necks... we believe most everything we see on television. (unfortunately!)

Annie Jones said...

Dave: Yeah, I have yet to find a brick and mortar establishment (except maybe car rentals) that don't take good ol' cash.