TONY COX, HOST:
This is TELL ME MORE from NPR News. I'm Tony Cox, sitting in for Michel Martin. Today, we are pausing to give thanks and, of course, we're also taking time to enjoy turkey and all of the trimmings, and watch some football as well. But it's also time again for Black Friday, when millions of Americans trade cranberry sauce and stuffing for credit cards and shopping bags.
Black Friday is the traditional start of the holiday shopping season. Many of us will get caught up in the frenzy and spend more than planned – maybe even more than we can afford. To get some friendly advice, though, on how to avoid all of that, we're joined now by consumer credit expert John Ulzheimer. He is also the author of "You're Nothing But a Number." John, welcome to the show.
JOHN ULZHEIMER: Thank you so much for having me.
COX: So as soon as the store doors open, John, Americans enticed by deep discounts will begin giving their wallets a real workout. Some will pay with cash; others will swipe credit cards. What should people keep in mind as they make their way to the register?
ULZHEIMER: Well, they should be very careful. And most people seem to enter a form of temporary financial insanity beginning on Black Friday, and will spend an enormous amount of money. And this makes them susceptible to the retail credit card offers that you almost always get at the register when you're trying to check out. However, this year, they're going to be especially aggressive. Generally, 10 percent is the discount they're offering if you'll open a new card. This year, we're already seeing discounts in the 15 to 20 percent range.
Which sounds very compelling to the consumer because you're going to save 20 percent off of whatever you purchase that day - which is very nice, of course. However, if you peel back the onion and look at the terms of those cards, they're absolutely not terribly advantageous to consumers because the interest rates are almost always well into the 20 percent range. And the credit limits on those cards are almost always below $1,000.
They seem to have become a one-size-fits-all type of credit card product where normally, to get interest rates well into the 20s and very low credit limits, you've got to have bad credit. That's a sub-prime type of credit card. However, they've become almost accepted in the retail court environment that people, even with fantastic credit, are willing to accept credit cards that have these very sub-prime types of terms, which makes it very expensive if you do choose to carry the debt from one month to the next.
COX: Is there a situation where signing up for one of these cards could actually work to someone's benefit? And what would that be?
ULZHEIMER: Well, look. The only real benefit to the consumer for signing up for one of these cards is the same-day discount. And if they're buying something very expensive - a flat panel television or a couch - something that's, you know, 20 percent off is going to save them hundreds of dollars. And that's really where the benefit ends. The minute you start rolling that balance from one month to the next with such a high interest rate, you really chew up that discount.
And eventually, the cards are going to flip into the favor of the issuer, and you're going to find yourself actually spending more for the item than what you thought you were going to get, even with the discount.
COX: There are so many areas, John, I want to hit with you. Let's talk about this one for a moment. The one that I always see at this time of the year - no payment, no interest for a year. What about those?
ULZHEIMER: Oh, those are very, very compelling, aren't they? Free money. No payment for a year. I'm not sure why that entices people so much. I mean, you're eventually going to have to pay it. It's just delaying the inevitable. The problem with those type of accounts is that you end up opening, essentially, a store credit card. They will max out the card, and put whatever the purchase is on the card.
And then you end up with that debt on your credit report for the entire year, with no balance being paid - meaning that the balance does not come down at all. And it normally does in a normal credit card environment. It's what we call stagnant debt. And stagnant debt is not good for your credit scores. And if it's going to damage your credit scores, it's going to do so the entire year - until we have this conversation next Black Friday.
So I would suggest that you thank the clerk for the offer, but avoid those types of in-store offers when possible.
COX: Let's talk about this scenario, John, for a moment. Suppose I don't have any choice. I have to use a credit card because I don't have any cash to pay for things for Christmas that I want to buy, and I am going to buy things for Christmas for my family, kids, etc., etc. Now, what kind of credit card should I use if I'm at, let's say, Macy's?
Should I use a Macy's card? Or if I have one of the other cards - Visa, MasterCard, American Express - should I use one of those instead?
ULZHEIMER: I would absolutely, every day of the week, suggest that you use a general-use credit card - like a Visa, a MasterCard, Discover or AmEx - over the retail store card, for two primary reasons. First off, the interest rates on those cards are almost always going to be better than the interest rate on a retail store card. You can have a Visa with an interest rate as low as 7.9 percent if you have good credit.
Even the average interest rate, according to the Federal Reserve, is somewhere between 12 and 13 percent, which is half of what it's going to be on a retail store credit card. So it's cheaper to carry the debt if you choose to do so. Second, the credit limit on those types of general-use cards are going to be much higher than what you're going to get on a retail store card. So from a credit scoring perspective, you're leveraging less of the available credit of the card, which is better for your credit score. So it's really a win for the consumer to just simply use one of the general-use credit cards that are already in their wallet.
COX: This is TELL ME MORE from NPR News. I'm Tony Cox, sitting in for Michel Martin. And we are talking with John Ulzheimer. He is a financial expert who specializes in consumer credit. We are talking about Black Friday, and how to keep yourself out of the poor house by - misusing those credit cards in your purse and in your wallet. What about, John, those ubiquitous gift cards? The grocery stores, these days, are full of every kind of gift card that you can imagine.
Are these a good deal or should we avoid them?
ULZHEIMER: I love gift cards, and I realize that they're not terribly personal when you're giving them to someone. But it is truly - in my mind, anyways - the bulletproof gift because you don't have to worry about sizes, you don't have to worry about styles, you don't have to worry about colors, and you don't have to worry about somebody returning it if they don't want it.
The fee that you pay for buying one of those gift cards is generally very, very modest - a couple of dollars at most. And to use the gift card - the recipient - you've got some pretty aggressive protections under the Credit Card Act that was passed just last year. And even if you, for example, lose the card for a few years or just simply choose not to use it, when you choose to get around to using it, it's going to have almost the entire value that was put on it when it was given to you in the first place.
And we couldn't have said this last year at this time, because the value could go away. Now, the Card Act protects the recipients. So I really love gift cards because of those reasons.
COX: Does it make a difference where you buy the gift card? Because since you can buy so many different types at the grocery store, as we said, do you have the same protection buying it there as if you would if you bought it at the retailer that it's for?
ULZHEIMER: You certainly do. And I'll put it as simply as I possibly can. A gift card is a gift card is a gift card, wherever you buy it from. The protections are equally aggressive and equally consumer-friendly, regardless of where that gift card comes from.
COX: One of the other things we are seeing coming back into the marketplace this year, this season, during these tough economic times, John, is the layaway. Is that a good thing or no?
ULZHEIMER: Isn't that great? The layaway, the blast from the past - credit before credit became credit.
(SOUNDBITE OF LAUGHTER)
ULZHEIMER: Layaway is actually not a bad deal for a couple of reasons. It completely takes the credit application and credit report out of the equation. It is not a true credit vehicle in the traditional sense of the word. The only downside that some people have with respect to layaway is that you are charged a small fee to set up the layaway plan with the merchant.
But if you compared that to the amount of interest that you'd pay if you were to buy the item on a true credit card and then revolve the balance for a few months, it's actually cheaper, in many cases, to do it on layaway. Some retailers are charging $5 to set up the layaway plan.
Here's the downside with layaway. In the olden days, when layaway was popular a couple of decades ago, you could actually take months to pay off the item and then actually take it home. They're not giving you that type of layaway any longer. If you sign up for a layaway plan, you better have it in your budget so that you're going to be able to make payments - maybe four or five of them - over a small, month or two- month period, because that's really all they're going to give you in order to pay off the item and come pick it up.
COX: Let's talk about buying online. Is that the way to go now, or is it too close to Christmas in order to buy something and have it in your hand in time for Christmas morning?
ULZHEIMER: We are still absolutely safe enough to buy items online, and get them well in advance of Christmas. You'll even see some stores advertising that if you buy the item three or four days before Christmas, they'll have it there in time to stick it under the tree. Also, free shipping.
So think of the three and a half dollars per gallon that you're not spending to drive to the mall for half an hour, find a parking spot, buy the item, and come home. Let someone else do that for you. Free shipping is fantastic. And that's generally something that retailers use, kind of as an added benefit for going online and purchasing goods versus having to go to the mall and actually buy them there.
COX: John Ulzheimer is a consumer credit expert. He joined us from the studios of Georgia public radio in Atlanta. John, thank you very much, and Happy Thanksgiving to you.
ULZHEIMER: Thank you for having me and Happy Thanksgiving to you, too. Transcript provided by NPR, Copyright NPR.