Should You Take That Big Retail Discount ... and the Credit Card That Comes With It?

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Amazon Rewards Visa Credit Card Chase We're called consumers because we like to shop. And we're doing plenty of it, despite the recession.

A new survey sponsored by the Consumer Federation of America and American Savings Education Council found that more of us are living beyond our means and failing to save enough for emergencies or retirement. We're also doing less to build home equity.

Some of us are fighting that trend by using good balance transfers deals for slashing debt. But if the data is to be believed, more are answering the siren call of store-specific retail credit cards that trade initial discounts for huge interest charges.

The Lure of the Store Discount

Chances are you've been pitched a retail card more than once. Usually it goes something like this: "Will you be saving 10% using your [name of store] card today?" The hope is you'll find the prospect of a discount alluring enough to sign up.

Some deals sound really good. Consider Target's (TGT) REDcard, which promises a 5% discount on all shopping. You also get free shipping for goods purchased through Target's website and have the option of enrolling in bonus programs that kick back payments to local schools and provide additional savings on non-prescription pharmacy spending. It's a decent deal, if you pay attention to the fine print.

The trick is to know the limitations to the bonuses being pitched and to never, ever use one of these cards to carry a balance. Here's a brief list of considerations:
  • What discounts are being offered? (Would you do better couponing or using a different card?)
  • Are there limits to bonuses? (Would you have to change habits to save?)
  • What's the interest rate? (How much will it cost if you slip up?)
The best retail cards combine generous benefits with reasonable grace periods for paying balances and industry-standard interest rates. Does Amazon.com's (AMZN) Rewards Visa measure up? That's the question before us today in this ongoing series examining the best (and worst) credit card offers out there.

3 things to know About Amazon's Rewards Visa

If you use Amazon to shop for goods and gifts, you've probably been pitched the company's Rewards Visa. Here's a closer look at the benefits and bugaboos:

1. Tiered earnings. As with other rewards cards, Amazon doles out points based on how you spend. Each dollar spent at Amazon kicks off three points, while gas, drugstore, and restaurant purchases provide two points per dollar spent. All other categories provide one point per buck. Collect 100 points and take $1 off your next Amazon order. You can also choose gift cards or cash back, or use your points for travel.

2. Instant credit. Like most retail cards, Amazon sets out the bait for consumers with the promise of instant cash. A rebate, in this case: $50 deposited directly into your account and redeemable for anything you can buy at the online store. You could also instantly redeem for a gift card.

3. Layers of fees. While the Rewards Visa doesn't include an annual fee, be sure to stay within your limits and avoid late payments. Tardy payments kick off anywhere from $15 to $35 in fees, depending on the size of the balance. You won't pay a fee for exceeding your limit if you've got the signature card -- designed for those with excellent credit -- but others can expect to pay $35 for those errors. In either case, the interest rate rises to at least 19.24% and as much as 29.9% if you fail to act responsibly in using the card.

You also don't need the Rewards Card in order to use points for Amazon.com shopping. American Express (AXP) has partnered with the retailer so that those enrolled in its Membership Rewards program can redeem directly to save on purchases.

This is the Right Card For You If ...

Apply for this card if you routinely use Amazon to shop for gifts and goods, or if you like the idea of earning credits for redeeming gift cards to be used in your shopping elsewhere. A few hundred dollars of monthly purchases at the site could result in sizable bonuses.

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But that's also the best-case scenario. Get careless and you'll pay a minimum of 13.24% in interest on your balances, and that's only if you have excellent credit. The rate can also shift over time as national rates go higher and lower. And then, of course, there's the near-30% penalty rate. Pay it, and you'll have wasted all the benefits of having the card in the first place.
Be smarter than that. Amazon may offer one of the best retail cards out there, but it's also the best in a bad category that trades short-term, cheap discounts for heavy fees and outrageous interest rates.

What credit cards do you use? What is the best credit deal you've found? Please let us know using the comments box below.

Motley Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and past columns. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com as well as writing a covered strangle position in American Express.

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