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Holiday Debt Traps

Although we may wish otherwise, the fact is many things in life are rarely as good as they seem to be at first glance. In many cases, when you investigate the fine print, “free” is hardly ever really free, “deals” are usually anything but, and “guarantees” tend to have an awful lot of prerequisites or exclusions.

As the holiday shopping season gets into full swing and our pocketbooks are flying open, tempting offers greet us in every store and mailbox — and not just from your typical retailer.

Credit card companies and other financial services providers also ramp up deals during the lucrative Golden Quarter. But many of these offers are more shine than substance, potentially leading you into a nasty debt trap.

Store-Branded Debit & Credit Cards

Nowadays, it often feels that every store has its own branded credit card — and they all want to help you save 10% on your purchase if you sign up today. But despite their well-rehearsed sales pitches, most store-branded credit or debit cards aren’t worth the wallet space.

For one thing, your typical store card is a closed-loop card, meaning you can only use them to make purchases with that specific retailer. And the same usually goes for any rewards you earn; you’ll only be able to redeem them with that brand. Plus, the average store credit card has an interest rate around 25%, which can make it extremely expensive to carry a balance on your store card for very long.

Store-branded debit cards are often little better, as these transactions can take several days to post to your bank account. Since few people maintain checkbooks anymore, instead relying on online banking to verify transactions, this means anyone not diligent about tracking their purchases could easily end up overdrafting on a store debit card purchase.

If you like the convenience and rewards of paying with plastic in your favorite stores, you may be better off with an open-loop card that can be used everywhere. You can easily find cash back credit cards offering up to 5% rewards for popular holiday retailers and department stores, including places like Amazon, Target, and Walmart. Plus, you can stack that cash back savings with coupon deals and promo codes to save even more.

For those with less-than-perfect credit, the biggest draw of a branded credit card is often that most store credit cards are easy to get approved for with fair credit, and many will accept poor-credit applicants, as well. But finding easy credit cards to get with poor credit doesn’t have to mean settling for a closed-loop store card with tons of red tape and limitations. A credit-building open-loop card from a major network, such as Visa or Mastercard, will be usable anywhere that network is accepted, offering more utility for your hard credit pull.

Skip-A-Payment Offers

Another popular marketing device that comes along, particularly in the expensive pre-Christmas shopping rush, is the skip-a-payment offers put out by many credit card companies and other lenders. These offers arrive in your mailbox or inbox, often with large letters eagerly proclaiming something like, “Save this holiday season by skipping a credit card payment.”

But what many unsuspecting borrowers don’t realize is that, while these offers can put a little extra cash in your pocket now, they’ll generally end up costing you more in the long run. You see, what skip-a-payment offers typically gloss over (via shoving it into the fine print) is that your balance usually doesn’t stop accruing interest simply because you don’t have to make a payment.

As a result, by skipping a month (or more) of credit card or loan payments, your balance will actually increase thanks to the addition of interest fees you didn’t pay the previous month. For credit cards, where your interest is based on your balance, this means the amount of interest you’ll be charged the next month will also increase. When it comes to loans, skipping a payment can extend the length of your loan on top of costing you more money.

Convenience Checks

With so much going on around the holidays, who wouldn’t want a little extra convenience in their lives? But as tempting as the name can be, convenience checks are usually most convenient for getting yourself into debt.

In general, convenience checks are a way to perform a balance transfer for a balance that doesn’t originate on a credit card, such as a personal loan. Though convenience checks can be used to finance just about anything, not just other forms of debt, the transaction is almost always considered to be a form of balance transfer in the eyes of the credit card issuer.

While balance transfers can be a good way to mitigate interest fees when done right, convenience checks are rarely the right way. When you inadvertently make a balance transfer by using a convenience check, you open the door to a host of fees you may not have intended. This includes the balance transfer fees common to most cards, as well as the interest you’ll be charged on the purchase. And since balance transfers aren’t privy to the grace period for new purchases, those interest charges start immediately.

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