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Beware Stores' In-House Credit Cards

It's a holiday scene ingrained in the modern shopper: You've made it to the front of the line, dumped your armful of holiday gifts onto the counter and pulled out your wallet when you hear a familiar refrain.

"Would you like to save by opening a credit card with us today?"

And right there, with other customers waiting impatiently in line, the psychological struggle for people's wallets continues.

In the past couple of years, consumers have discovered a new conscientiousness when it comes to saving and to using credit -- but this newfound value is in direct conflict with retailers trying to get their branded plastic into consumers' hands.

"It's a battle between retailers and consumers," said Kit Yarrow, a consumer psychologist. "Retailers make more money when consumers spend on their credit cards, so they offer good incentives in a quest to get people to use the store credit cards. It's only natural that consumers be enticed by that, especially at a time when we're more cost-conscious."

People who use store credit cards are a cash cow for retailers. For instance, Target has said that customers who use its store credit cards spend about 50 percent more in a year than customers who don't.

But some consumers who have been burned by bad credit practices in recent years have become wary of the "buy now, worry later" mentality.

So retailers are working hard, at times trying new tactics, to ensure that their army of store checkout clerks will win you over.

"There is going to be no slowdown in aggressiveness of retailers to push these cards," said Farnoosh Torabi, personal finance expert for Credit.com.

Consumers have been indicating that they're cutting their credit use in general this holiday season in an attempt to avoid a credit hangover come January.

A survey by the National Retail Federation found that consumers' intentions to rely on credit cards for holiday purchases are at the lowest level since 2002. Forty-three percent of shoppers say they will rely on debit cards as the primary form of payment this holiday season and 25.7 percent will use cash, a 3.2 percent increase from last year.

The percentage of shoppers who say that credit cards will be their primary payment vehicle has fallen every holiday season since 2007. This year, 27.6 percent of shoppers say they plan to charge their gifts.

Still, "this is the time of year when pretty much everyone is shopping," said Jody Rohlena, senior editor of ShopSmart Magazine, a publication of Consumer Reports.

"If you're in a store, it can be really tempting to open a credit card if you can save 10 percent that day on that big holiday purchase."

In addition, getting approved for a store credit card is often easier than it is for other types of credit, because store credit cards tend to have lower limits and higher interest rates, and are therefore less risky for the company.

To boost their chances of winning the battle, some retailers are fine-tuning their sales tactics.

"A lot of retailers are going to be more creative selling their credit cards than in the past," said Mike Anderson, vice president of consumer insights and communication at The Center for Sales Strategy, based in Tampa. "If the cards are presented as a cash-management tool, consumers are more likely to go for it."

For example, Ace Hardware teamed with Visa this year to replace its poorly performing private-label credit card with an Ace Rewards Visa card, giving consumers 3 percent in rewards in-store, as well as 2 percent in rewards at gas stations and grocery stores and 1 percent in rewards everywhere else.

"This is a way for our most loyal customers to earn rewards faster and drive them back into the stores," said Ace's consumer card manager, Jim Friel. "It's a way to offer great financing tools for consumers to come in and make bigger purchases."

Meanwhile, Target this holiday season began offering 5 percent off nearly all purchases made with its branded credit and debit cards, an incentive that Melissa Reed of Lake Worth finds enticing.

"If I can save money just by using the store's card, it definitely gets my attention," said the mother of three, adding that she's drawn to cards that offer savings on all purchases, not just the initial one.

And Credit.com's Torabi said she's lately seen Victoria's Secret salespeople tout the extra incentives of their store credit card more than the initial discount being offered in order to convince customers that the card is a good idea in the long run.

Retailers "realize the consumer is catching on to the gimmick," Torabi said. "They've started to present the idea of getting a credit card as a long-term investment, not just a one-time thing."

Of course, the idea of saving 10 percent or 15 percent on a big holiday purchase is still a pretty enticing promotion in and of itself.

Bill Hardekopf, chief executive officer of LowCards.com and author of The Credit Card Guidebook, said that saving money in the short term can be enticing for consumers who want to buy holiday presents but are on a tight budget.

"I hope consumers have learned not to jump on these things just to save money in the short term," Hardekopf said. "But it's still about what you can do for me today. We're still going to be inundated with, 'Hey, would you like to save on your purchase today?' because that's what we respond to."

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