-- Before heading out to shop, you don't slip a can of pepper spray into your purse, and you'd rather spend Thanksgiving with your family than in a tent outside a big box store. Still, when you head out to the mall or cruise the Internet, you want a deal. Four years of hard times have left us hard-wired for discounts, even during the holidays.
Retailers are obliging by promoting coupons, free shipping and one-day sales. They're also offering discounts of 20% or more for customers who sign up for a store credit card.
Credit card companies have joined in the festivities, offering generous rewards to new customers who use their cards for all their holiday needs. Chase and Citibank are offering $200 cash back if you spend at least $500 within three months of opening the account.
But plenty of perils await shoppers who succumb to these offers. Numerous studies show that consumers tend to spend more when they use credit cards than they do when they use debit cards or cash. For example, consumers spend an average of $82.10 for a single online transaction when they pay with a credit card, vs. $58.29 when they pay with a debit card, Javelin Strategy & Research says.
That increases the risk that you'll start the year with a credit card bill you can't pay off at the end of the month. But even if you dutifully pay off your balance, applying for new credit during the holidays could damage your credit score, says John Ulzheimer of SmartCredit.com. Point shavers include:
•Inquiries. When you apply for a credit card, the retail store or credit card company pulls your credit reports to check your credit history. Multiple inquiries could dent your FICO score, the most widely used credit score, by 15 to 30 points, Ulzheimer says. FICO believes that consumers who open several accounts in a short period are at greater risk of falling behind on their debts.
Opening a lot of retail store cards is particularly damaging to your score, Ulzheimer says. Closing the accounts after you've taken advantage of the discounts won't undo the damage, he says.
•Credit-utilization ratio. Another factor used to calculate your FICO score is your credit-utilization ratio, which is based on the amount of debt you have outstanding as a percentage of your available credit. The FICO model looks at the combined utilization ratio for all your accounts, as well as the ratio for individual accounts.
That's where retail store cards can get you into trouble, Ulzheimer says. Most retail store cards have low credit limits — usually well under $1,000. Even a relatively small purchase could generate a high utilization ratio for a new store card, which will hurt your score.
•Multiple accounts. Another drawback to retail cards is that they can usually only be used in one store or one chain. That means you may need to use multiple cards to complete your holiday shopping. Even if you pay them off, having a lot of small accounts with balances on your credit report will hurt your credit score, Ulzheimer says.
In most cases, he says, you're better off using one or two general purpose credit cards with high credit limits for most holiday purchases. That way, you won't have a lot of "nuisance balances" on your credit report and maintain a good credit-utilization ratio, Ulzheimer says.
The other advantage to putting all purchases on one or two general purpose cards is that you'll hit the thresholds required to earn cash back and other rewards. But if you do this, you must be ruthlessly realistic about your ability to pay off the balances by the due date. Otherwise, interest will wipe out the value of your rewards, says Gerri Detweiler, co-author of Reduce Debt, Reduce Stress.
Interest rates for rewards cards tend to be higher than cards that don't give airline miles or cash back. The credit card reform legislation that took effect last year prohibits issuers from raising interest rates retroactively on cardholders' existing balances unless they're 60 days behind on payments. But the law placed no limits on the amount of interest card issuers can charge when you open an account.
An analysis of credit card complaints received by the federal Consumer Financial Protection Bureau shows plenty of confusion remains about how credit card interest rates are calculated. Billing disputes were the most common complaint by consumers; interest rates came in second. For more information, go to consumerfinance.gov.