Special financing offers — “Pay nothing until March 2015,” “$0 down, 0% interest” and the like — are a common pitch this time of year, showing up for purchases of everything from electronics and furniture to toys and clothes.
In fact, 70 percent of major retailers offer a financing option, with more jumping on the bandwagon every year, according to a study from CardHub.com. Kohl’s (KSS), Dillard’s (DDS) and True Value are among the brands that have expanded or added financing this year, the site reports.
Depending on the deal, consumers might make monthly installments over a set period or pay at their discretion (with a low monthly minimum) until the lump sum comes due.
But credit and debt experts say financing deals can be a ticking time bomb.
“We think these offers are on [Santa’s] naughty list, no matter how stores present it to consumers,” said Odysseas Papadimitriou, CEO of CardHub.com. By his estimate, financing can be 27.5 times as expensive as using a credit card.
John Ulzheimer, credit expert at CreditSesame.com, minced fewer words. “I can’t stand those offers,” he said. “I hate them.”
Terms and conditions get ugly very fast if consumers miss a payment or fail to pay the balance in full within the promotional period. If that happens, you’ll owe interest on more than just the remaining balance, Papadimitriou said.
Half of retailers’ policies apply interest retroactively from the date of purchase to the entire balance, often at rates that top 20 percent.
That’s enough to counterbalance any holiday sales or discounts, and can add a month or two to the time it takes to pay off the debt.
“It’s completely counterintuitive, and people don’t expect that,” Papadimitriou said.
And it’s easier for consumers to be caught off balance than they might think.
“This time of year in particular gives people a sense of hopefulness that translates to spending,” said Kit Yarrow, chair of the psychology department at Golden Gate University in San Francisco. But optimism that next year your financial situation will improve may not reflect reality, she said.
Financing also typically requires a minimum purchase that may be as much as several hundred dollars, said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. That encourages consumers to spend more — a fancier computer or an impulse dining room set, for example, as well as the planned sofa. J.C. Penney (JCP) limits its financing offers to furniture and mattress purchases of $1,000 or more; at Apple (AAPL), minimums range from $499 to $1,599, depending on the term length.
“A lot of well-meaning people dig their own financial hole with that kind of thinking,” she said.
Even consumers who won’t have a problem paying off the debt in a timely way can sustain serious damage. That’s because some stores finance your purchasing by opening a new store credit card with a line as large as your purchase.
“It’s essentially going to be a maxed-out credit card,” Ulzheimer said. “Worst-case scenario? Well over 100 points lost on your credit score.” For someone planning to buy or refinance a home or purchase a car in 2014, even a slightly lower score could translate into a higher interest rate and thousands more in interest paid.
A credit card may be the cheaper financing option. Cards including Chase Freedom (JPM) and Capital One Platinum Prestige (COF) offer new cardholders 0 percent on purchases for up to 15 months, with any remaining balance subject to regular interest rates, Papadimitriou said.
Purchases are also covered by a range of credit card benefits and protections, including price matching and the right to dispute charges, Ulzheimer said.
But the best option yet is delayed gratification, as studies have found that purchases are more satisfying when people save for them.
Plus, Yarrow said, “saddled with debt is a bad way to start the New Year.”
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One reason why Marquis’ gas purchases might have triggered a fraud lockdown? Filling their tank is a common first move for credit card thieves.
“Some of the things they look at are small-dollar transactions at gas stations, followed by an attempt to make a larger purchase,” explains Adam Levin of Identity Theft 911.
The idea is that thieves want to confirm that the card actually works before going on a buying spree, so they’ll make a small purchase that wouldn’t catch the attention of the cardholder. Popular methods include buying gas or making a small donation to charity, so banks have started scrutinizing those transactions.
Of course, it’s not a simple matter of buying gas or giving to charity — if those tasks triggered alerts constantly, no one would do either with a credit card. But Levin points to another possible explanation: Purchases made in a high-crime area are going to be held to a higher standard by the bank.
“It’s almost a form of redlining,” he says. “If there are certain [neighborhoods] where they’ve experienced an enormous amount of fraud, then anytime they see a transaction in the neighborhood, it sends an alert.”
(Indeed, Erin tells me that one of the gas purchases that triggered an alert took place in a rough part of Detroit, which she visited specifically for the cheap gas.)
People who steal credit cards and credit card numbers usually aren’t doing it so they can outfit their home with electronics and appliances. They don’t want the actual products they’re fraudulently buying; they’re just in it to make money. So banks are always on the lookout for purchases of items that can easily be re-sold.
“Anytime a product can be turned around quickly for cash value, those are going to be the items that you would probably assume that, if you were a thief, you would want to get to first,” says Karisse Hendrick of the Merchant Risk Council, which helps online merchants cut down on fraud. Levin says electronics are common choices for fraudsters, as are precious metals and jewelry.
Many thieves don’t want to go through the rigmarole of buying laptops and jewelry, then selling them online or at pawnshops. They’d much prefer to just turn your stolen card directly into cold, hard cash.
There are a few ways that they can do that, and all of them will raise red flags at your bank or credit union. Using a credit card to buy a pricey gift card or load a bunch of money on a prepaid debit card is a fast way to attract the suspicions of your credit card issuer. Levin adds that some identity thieves also use stolen or cloned credit cards to buy chips at a casino, which they can then cash out (or, if they’re feeling lucky, gamble away).
When assessing whether a purchase might be fraudulent, banks aren’t just looking at what you bought and where you bought it. They’re also asking if it’s something you usually buy.
“The issuers know the buying patterns of a cardholder,” says Hendrick. “They know the typical dollar amount of transaction and the type of purchase they put on a credit card.”
Your bank sees a fairly high percentage of your purchases, so it knows if one is out of character for you. A thrifty individual who suddenly drops $500 on designer clothes should expect to get a call — or have to make one when the bank flags the transaction. If you rarely travel and your card is suddenly used to purchase a flight to Europe, that’s going to raise some red flags.
Speaking of Europe, the other big factor in banks’ risk equations is whether you’re making a purchase in a new area. I bought a computer just days after moving from Boston to New York, and had to confirm to the bank that I was indeed trying to make the purchase. Levin likewise says that making purchases in two different cities over a short period of time raises suspicions.
“I go from New York to California a lot, and invariably someone will call me [from the bank], ” he says. Since one person can’t go shopping in New York and California at the same time, any time a bank sees multiple purchases in multiple locations in a short period, it’s going to be suspicious.