Deal or No Deal?
10% off! Cash back! No interest! Sure, these common offers sound sweet, but will they really save you money?
(MONEY Magazine) – Just like the mysterious "banker" on Deal or No Deal, sellers of all sorts dangle tempting offers before you. And like the contestants on the TV show, you're often left trying to make a decision with imperfect information and little time. On TV it's entertaining; in real life it's just plain stressful.
When a deal sounds alluring, you're right to suspect there's a catch. There always is. In an ideal world, you'd take a few minutes to read the fine print and run the numbers, then make your decision. "Time is your friend and the seller's enemy," says Jennifer Leach, a consumer advocate with AARP. But when the salesclerk is waiting and the promotion is expiring, you might not have a chance to do due diligence. So check the offers now, and when they're presented, you'll know whether to say deal or no deal.
1 Interest-Free Financing You really want a new high-efficiency front-loading washing machine, but the $1,200 price tag is hard to swallow. Don't worry, says the salesman, the store offers interest-free financing for 18 months. Deal?
No deal! Paying the minimum every month (usually 4% of the balance) will never clear your debt within the interest-free window. And when that promotional period is up, you're typically socked with interest that was actually accruing during those 18 months, at a rate as high as 20%. If that happens, you could end up paying more than $755 in interest before you've paid off the machine. You might be tempted to game the system--to put $1,200 in a high-yield savings account for 17 months and 29 days, pay off the balance and pocket the interest. But that'd net you only about $75. Besides, no matter how you play it, borrowing from a finance company can really hurt your credit score.
2 Open Bank Account, Get Bonus The bank down the street is handing out a free portable DVD player to anyone who opens a new checking account. Deal?
Deal if... ...you're okay with the terms of the account. These types of splashy promotions are designed to lure customers away from other banks, and often you have to keep a minimum balance or pay a certain number of bills a month online. But be sure to keep up your end of the agreement, or else the bank could charge your account for the retail cost of the gift. It's also worth noting that the bank reports the value of the bonus to the IRS as taxable interest income.
3 Extended Warranty Your new PC is just a few mouse clicks and $700 away. Like most desktop computers, it comes with a limited one-year warranty. But for another $190, you can extend the coverage to four years. Deal?
No deal! There's a reason extended warranties are highly profitable for manufacturers: Buyers seldom cash in. PCs, and consumer electronics in general, are very reliable these days. "If you take care of your equipment, you really don't need a warranty," says technology analyst Rob Enderle of the Enderle Group. Besides, four years is an eternity in the computer world. If your PC breaks down in three years, you'll want a newer, faster machine by then, not a replacement. Save the $190 for a down payment on your future upgrade.
4 Cheap Stock Trades Eager to take charge of your investments, you're intrigued by an ad for an online brokerage account: $4 TRADES! Deal?
No deal! To get the low rate, you may have to make 10 or more trades a month, which will run you at least $480 a year. Worse, your investment performance is likely to suffer. Studies show that the most active traders underperform their less manic peers. You're better off paying a more pedestrian $12 a trade and keeping your inner Jim Cramer in check. In other cases these low rates apply only to automatic investments (stocks you buy on a recurring basis). But $4 is a big commission if you're investing only a few hundred dollars per month.
5 Balance-Transfer Cards You open your mailbox to find a pre-approved offer for a credit card charging 0% interest on balance transfers for 12 months. Sounds tempting, especially since you're paying off a balance at a high rate on another card. Deal?
Deal if... ...you plan to do all of the following: Put only the balance on the new card, never pay late, and pay off the entire amount in 12 months. (First you'll want to find out how much the fee for the transfer is; you don't want it to cancel out the benefit.) If that much discipline makes you cringe, read on.
No deal! ...if you're not so diligent. This card charges 0% on balance transfers, but unless otherwise stated, not on new purchases. What you charge gets hit with a higher rate (sometimes 18%), and your payments typically go toward the zero-rate balance first. Even if you're slowly paying down the balance, the finance charges on new purchases are piling up. Plus, miss a payment--oops--and the rate on your balance transfer could go from 0% to 30% in a second.
6 Car Financing vs. Rebate You're at an auto dealership, about to sign for the $30,000 SUV of your dreams. You saw it advertised with a $2,000 rebate. Now the salesperson is dangling 0% financing instead. Deal?
Deal if... ...you plan to keep the car for a while, generally at least four years. Only at that point will the interest savings top the amount of money you could have gotten back in the rebate, says Jesse Toprak of Edmunds.com. In this instance, with 0% interest over five years, you'll pay only the $30,000. The same car with the rebate, no down payment and 7% financing over five years would cost $33,266. (To weigh other offers, check the Decision Calculator: Low APR vs. Cash Back at Edmunds.com.) Manufacturers and dealers usually extend these incentives when they're having a hard time unloading inventory; with SUVs right now, fuel prices have made the vehicles unfashionable. So be aware that you may give back some of your savings in the form of a lower resale value down the road.
7 No-Cost, Low-Rate HELOC You've been thinking of opening a home-equity line of credit when you see the following offer in the window of your bank: NO-COST HELOC! 2.99%. Deal?
No deal! First of all, banks don't usually charge to establish a line of credit, says Keith Gumbinger, a principal at mortgage-data provider HSH Associates. So don't let the no-cost offer sway you. And that teaser rate? It'll expire, usually within six months; then your HELOC may balloon to the prime rate plus one or two percentage points, while a bank across town is offering prime minus one. For the real bargains, look to the smallest lenders in your market. Because they don't have the money for big ad campaigns, says Gumbinger, "the little guys compete on pricing." And don't try to hop from teaser rate to teaser rate. The lender will likely hit you with an early-termination fee if you close the line of credit within the first three years.
8 10% Off with a Store Card Bonanza! Your new fall wardrobe, all in one store! Grand total: $1,000. Ouch. As you pull out your wallet, the salesclerk pitches you on the store credit card: "It'll save you 10%. That's $100." Deal?
No deal! Store credit cards generally charge rates over 20%. So if you carry a balance, your finance charges will quickly wipe out the $100 you saved. Say the card charges 21% and you make the minimum payment of 4% each month. In six months you'll have paid $99.28 in interest. Put your new outfits on a regular bank card with a 10% rate, and you'll pay only $46.20 in interest. But there's another reason to shun a new store card: Every credit application will ding your credit score, and applying for multiple cards over a few months can really cut into your rating. That said, it's probably okay to do this once or twice in a lifetime. Simply keep the card for a while, use it occasionally and pay promptly; you may be able to undo the damage.
9 Cash Back on Gas You've just blown $45 on gas for the second time this week when you see an ad for a credit card that gives 5% cash back at gas stations and supermarkets. Deal?
Deal if... ...you never carry a balance. The catch with giveback cards is that they generally charge interest rates at least one percentage point higher than a standard card's. No problem for you if you pay in full (just make sure you choose a card that is low fee or no fee). Your challenge is earning the most cash for your spending patterns, says Curtis Arnold of CardRatings.com. If you charge less than $15,000 a year, choose Citi Dividend Platinum Select (800-248-4226), which pays 5% back on gas and groceries, up to $300 a year. If you charge more, you can earn more with Blue Cash from American Express (800-223-2670). But...
No deal! ...if you ever carry a balance. "If you pay interest on a rewards card, you lose the value of the reward," says Catherine Williams, vice president of financial literacy at Money Management International. Forget about rewards and look instead for a card with a low interest rate.
10 A Free Credit Report After hearing so many ID theft horror stories, you're nervous. What about those free credit reports you see advertised? Deal?
No deal! Here's what you won't see in a commercial: Under federal law, each of the major credit bureaus (Equifax, Experian and TransUnion) must give you one free credit report a year. The only place to get them is AnnualCreditReport.com. And what about the offers you've seen on TV and the Web? These kinds of sites (among them, FreeCreditReport.com and FreeCreditProfile.com) are hawking credit monitoring services. You'll have to sign up to get your "free" report, and if you don't cancel within 30 days, you'll be charged $10 to $13 a month. Unless you've been a victim of identity theft, you don't need to pay for a monitoring service.
BONUS Supersizing at the Cinema Your movie ticket cost $6.50. Now they want $8 for a small popcorn and a small soda. But you can get a medium popcorn and a medium soda, which look three times as big, for just 50¢ more. Deal?
Deal if... ...you were planning on investing in the small combo anyway. You do pay less per cup on the medium soda and popcorn. The reason the concessions folks can afford to be so generous: They buy popcorn and soda cheap and then sell it to you at what some experts estimate to be a 90% markup. So they can throw in a few extra cups, knowing you'll smell a deal (or is that the delicious aroma of hot buttered popcorn?). Granted, you're also tripling up on calories and fat. So, uh, maybe base this decision not only on your wallet but also on your waistline.