Beware Hidden Costs of Credit Cards as Retailers Push Discounts

Consumers need to be aware of hidden costs and fees that come with credit-card offers, especially as holiday shopping goes into full swing.

That’s the message from MagnifyMoney.com, a website that seeks to help people compare financial services including credit cards, savings accounts and personal loans.

The company warns that a store’s money-saving offer, such as 10 percent off a purchase after signing up for a store credit card, may end up being very expensive.

“Any time you're offered something at that point of purchase, it may not be as good a deal as it seems,” Nicholas Clements, a co-founder of MagnifyMoney.com who previously ran the U.K. card business for Barclaycard, told Moneynews in an exclusive interview. “If you pay that balance off in full when the statement arrives, it can be a good deal. But remember, interest rates on store cards are incredibly high.”

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The Sears Mastercard charges 25.24 percent interest, Macy’s American Express 24.5 percent, JC Penney 26.99 percent and Target 22.99 percent on unpaid balances, even if a consumer's credit record is flawless.

“Places like Target, Macy’s and others charge that rate regardless of your credit score,” Clements said. “If you can’t pay that balance off in full at the end of the promotion period, you’re going to end up spending a lot of money.”

The charges can add up quickly so that the 10 percent saved in the store is gone after six months of interest payments.

Clements also said to be aware of 0 percent offers, and to understand the difference between waived interest and deferred interest. If the interest is deferred, the balance needs to be paid off when it's due at the end of the promotion period or the interest gets charged retroactively to the date of the purchase.

“It can be a pretty nasty surprise,” Clements said. Waived interest is a better deal because the interest doesn’t add up during the credit card's promotion period.

Clements recommends preparing a gift budget before hitting the malls to avoid getting swept up in the promotional zeal of the holidays.

“If you have a strict budget beforehand, you’re in better shape,” Clements said. “That may sound simple, but I used to work in banking, and our approach was ‘we want to get you as excited to spend money you don’t have as possible.’”

This year, card issuers are sweetening their offers to entice consumers to spend more, according to the Wall Street Journal.

Macy’s cardholders get a 15 percent or 20 percent discount on purchases the first and second day they have a store card, up to $100 total, the newspaper reported. Cardholders also get coupons throughout the year for additional savings.

J.P. Morgan Chase offers 5 percent cash back on up to $1,500 in purchases with the Chase Freedom card at Amazon.com, Zappos.com and some department stores, the newspaper reported.