When Choosing a Credit Card for Holiday Shopping, Choose Wisely

Our trajectory has us headed on a collision course with Black Friday, and that means we’ll be opening up our wallets, big time, for the remainder of 2013.

And while the spending projections for “Holiday 2013” have been pretty few and far between, there’s no doubt that we’ll collectively spend more in the last 5 weeks of the year on gifts than we spent during the first 47.

And despite their poor reputation, which is entirely unfair, many of us will use credit cards for those purchases.

Not only do credit cards provide us with portable capacity in the thousands of dollars, but they also provide you will much more aggressive fraud protection than even our beloved debit cards.

Your liability is capped at $50 for fraudulent use of your credit card and most issuers won’t even ask you for that amount if you’ll notify them of the lost or compromised card as soon as possible.

Still, there are good choices and better choices when pulling out your plastic.

Retail Store Cards

These are the cards that are issued with the branding of the store or chain of stores.

These are the cards that can only be used at the specific store that issued them.

And while the use of these cards results in an almost endless flow of discount offers in the mail, these aren’t the best choice when you’re holiday shopping.

First off, the average interest rate of retail store credit cards is around 10 percentage points higher than their non-retail peers.

In fact, even with great credit reports and credit scores your retail store card interest rates are going to be above 20 percent.

That makes holiday gifts even more expensive if you cannot pay them in full in month one of 2014.

Second, the credit limits on retail store cards are notoriously low relative to general use credit cards, like Visa, MasterCard, Discover and American Express.

I guarantee that you don’t have a $15,000 credit limit on your Macy’s credit card. And while you may not care about that, your credit scores certainly do.

One of the most important measurements taken by credit scoring models is called the “debt-to-limit” ratio, or  “revolving utilization” for us credit junkies.

Point being, that ratio is going to be much better if you buy $500 worth of gifts on a card with a $10,000 credit limit than it will on a card with a $1,000 credit limit.

Prepaid Debit Cards and Traditional Debit Cards

These are not the same thing although they sound similar. A prepaid debit card is purchased at a variety of convenience stores or via some celebrity’s website.

Prepaid cards are notorious for their litany of fees but do offer a couple of positives…controlled spending and no overdraft fees.

If your prepaid card has only $500 loaded onto it, your spending is capped at $500. But, with the fees being stripped off of the card’s value the $500 is really something less.

Debit cards are tied to your checking account at your bank or credit union. You are also limited to spending no more than the funds available in your account.

Your fraud protections under the Electronic Funds Transfer Act aren’t as good as the Fair Credit Billing Act (for credit card fraud), but it’s still pretty decent as long as you notify your bank immediately after your card has been stolen.

General Use Credit Cards

Yeah, these are by far going to be your best option.

Despite their unfair reputation, credit cards are by far the best tool when it comes to the type of frequent use you’ll be doing over the next two months. Their fraud protection is unparalleled.

And, if the card is stolen it’s not your money that’s at risk. And, if you are an adult and can be disciplined with their use a credit card really has no downside.

You’ll also do your credit scores a favor by using a card with a large limit, thus making the balance accrued during your holiday shopping less problematic.

And, it’s not hard to find a card that doesn’t have an annual fee. Add rewards points, miles or cash back to the equation and you have a nice cherry on top.

Besides, have you ever tried buying someone online using cash? Doesn’t work very well.

John Ulzheimer is the Credit Expert at CreditSesame.com, and a credit blogger at SmartCredit.com, Mint.com, and the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. You can follow John on Twitter here.