Department store credit cards
Michael Abramowitz

Is 10 percent off really worth adding another credit card to your growing collection?

Macy's, Sears, JCPenney and all of their friends in the retail industry know how to lure us in for the big catch. They offer a sweeter deal for our purchases if we'll sign up for a harmless department store credit card.

Yes, you'll save 10 percent today if they get permission to put your name on a pretty piece of plastic. It's the deal of the century. You can't go wrong! Or can you?

The last temptation of price

"I would absolutely not take a department store credit card," says Deborah McNaughton, the Tustin, Calif.-based author of "All About Credit (Questions and Answers about Most Credit Problems)."

McNaughton describes the store cards as a come-on gimmick. "Your 10 percent discount turns into 21 percent or higher interest. You can really fall into a trap. Department store credit cards are the worst credit wise."

In McNaughton's example, if you were to buy $300 worth of clothes and take the 10 percent discount, your bill would be $270. But if you're unable to pay the balance by the due date, you'd pay $56.70 in interest, which would totally wipe out your $30 savings. And the interest charges would continue at 21 percent until you pay it off.

There's nothing interesting about paying interest

The one instance where taking a discount for a credit card makes sense is when there's a large purchase involved, says Sunny Orr, director of the Center for Financial Responsibility at Texas Tech University in Lubbock. But she cautions that the bill should be paid in full by the due date.

Otherwise, you're setting yourself up for an interest rate whammy. And even if you pay off your balance during the first month, there are other pitfalls -- such as having too many open lines of credit.

"If you apply for a lot of credit, it makes creditors nervous," explains Ann Coulson, director of the Institute for Personal Finance in Columbus, Ohio. "Even if you cancel the card, it doesn't always get cleared off your credit report."

That can lead to a big mess, especially when applying for a mortgage or car loan. Creditors look at your credit report, and if they see a dozen credit cards open under your name, they can get antsy at approving a loan -- even if you carry zero balances. Creditors assume that you can gain access to the open credit at anytime, even if you don't use the card.

"It can really hurt you in the long run," cautions Orr.

More black eyes than Rocky

To ensure that your credit report doesn't make lenders nervous, experts say you should carry no more than two credit cards. They suggest holding cards such as Visa and MasterCard, which offer lower interest rates, wide acceptance and no annual fees.

"If you're out on the road traveling, there's not much that you can do with a Macy's card," says Mike Kidwell, vice president and co-founder of Debt Counselors of America in Rockville, Md.

Also, by carrying a bundle of credit cards, you open yourself up to identity theft, he warns. Crooks can steal your open, long-forgotten credit account numbers and use them to run up charges.

If you have more than two cards, the financial experts recommend that you consolidate your debts to the card with the lowest rate. Afterward, contact the issuer of the cards you wish to cancel -- in writing by certified mail. Make sure the creditor notes "canceled by consumer" on your credit report.

If the report says "canceled by subscriber," lenders see that as a black eye as well, because they think the creditor was forced to close the account due to delinquent payments. The experts say to check your credit report for errors at least once a year through the major reporting agencies. To reach Experian, call (888) 397-3742, Equifax (800) 997-2493 and TransUnion (800) 888-4213.

Finally, the next time you're tempted to add another credit card to your wallet while shopping in a department store, you might want to consider this:

"Credit is a marvelous tool in our society, but it needs to be taken seriously," states Joy Thormodsgard, chief operating officer, National Foundation for Consumer Credit in Silver Spring, Md. "Look at your wants and needs. Ask yourself, 'Is this something that I really need to have, and do I really want to borrow against future income to have it?'"

Remember, they can't charge interest when you pay with cash.

Buy now, pay later. But make sure that it's paid in full.

When you make a major purchase like a computer, stereo or bed, stores will often tempt you with deals offering 90 days or six months same-as-cash. In other words, you don't pay the bill until three-to-six months down the road -- interest free.

Also, many stores will accept a lower price than advertised, if you pay now for items on which they offer same-as-cash deals, advises Robert McLeod, professor of finance and executive director of MBA programs at the University of Alabama in Tuscaloosa.

"Always bargain if you have the money now to pay a same-as-cash deal, and ask what they'll take up-front," he recommends.

But what if you want to pay six months later as opposed to now?

"I love those deals," says Mike Kidwell, vice president and co-founder of Debt Counselors of America in Rockville, Md. "My wife and I buy merchandise for our home, like carpet and furniture, using same-as-cash. The key is to pay the entire bill by the end of the period."

Kidwell cautions that if the balance on a same-as-cash deal isn't paid in full by the end of the deferment, interest is charged on the entire amount from day one. So if you bought a $1,000 couch, six months same as cash, and paid $500 toward the bill during that period, you would still typically pay 21 percent interest on the $1,000. With that scenario, you would now owe an additional $210 in interest. Kiss your good deal goodbye.

If you can't pay off the balance before the grace period ends, Kidwell and McLeod both suggest either borrowing the money at a lower interest rate from a bank or credit union, or transferring the balance to a lower rate credit card before the balance is due.

-- Posted: Aug. 24, 1999