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Store loyalty programs: Discounts can have hidden costs

What good is 20% off something you wouldn't have bought otherwise?

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Store loyalty programs can be a great way to save green, but if not used properly, they could put your finances in the red.

That 20 percent off coupon from your favorite clothing store can help you save if you already have a sweater for Mom on your shopping list. But do you really need that three-tier scratching post for Fluffy or heated dog bed for Fido just because you can save $10 on your purchase?  

Store loyalty programs: Discounts can have hidden costs Store loyalty programs can be a double-edged sword. While they reward regular customers by offering meaty coupons and discounts, often without charging membership fees or linking rewards to store credit cards, they also can tempt shoppers to buy things they don't need, simply to get a good deal.

And reward programs are often tied to how much you spend, so the more you buy, the bigger the discounts, encouraging you to spend even more.

"Don't take what should be a reward and have it become a punishment when you get your bill," says Todd Mark, vice president of education for Consumer Credit Counseling Service of Greater Dallas.

A 2008 study by Colloquy, a firm specializing in loyalty marketing, found there were more than 1.8 billion loyalty program memberships in the United States, up nearly one-quarter from 2006. That translated to more than 14 loyalty memberships per household.

Retail loyalty programs accounted for more than 700 million of those memberships. Programs that weren't tied to credit cards weren't separated out from those that were.

Book stores were, by far, the most popular for their loyalty programs, with 62 percent of respondents enrolled, a study by First Data, a technology and payments processing company, found in 2008. For the 500 consumers surveyed, pet store loyalty programs came in second, at 31 percent.

Store loyalty programs appeal to both consumers and businesses. Shoppers like the discounts, while businesses know it's easier to keep a customer than attract a new one, Mark says

Store loyalty programs: Discounts can have hidden costs

If you're a fan of a particular store and plan to shop there anyway, it can be a good move to use store coupons or discount certificates to reduce costs. On the flip side, Mark says, it could mean "paying 80 percent for something you had no intention of buying in the first place. That could equate into expensive debts you didn't budget for."

But there are ways to use the programs effectively, without running up debt.

Money can't buy you love
If you receive a 20 percent off coupon from your favorite retailer, it can be tempting to run out and buy something for Mom that normally costs $100, knowing that you'll pay only $80. But if you only had $50 budgeted for her gift, "don't let it (a discount) enable you to spend beyond your budget," Mark says.

Deals often get better closer to Christmas Day, as retailers hope to close out their year with strong sales. So someone who finished his shopping early might feel the urge to go out and buy more, thinking, "My kids will love me more," Mark says.

Stick to your guns
David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, urges consumers to draw up a holiday shopping list and a budget and "don't veer from it."

If you've planned to spend $50 on a pair of jeans for your son, and you get a $10 off coupon, rather than spending $40 for the jeans and $10 on something else, Jones recommends sticking that extra $10 in the bank and using it to pay off the holiday shopping bills when they come due.

Shop year-round
Cate Williams, vice president of financial literacy for Money Management International, says consumers who receive store rewards should think about how to use the programs for holiday gift giving not only at Christmas time, but throughout the year.

Williams failed to read the fine print on a discount from an office supply store and let a $43 reward slip through her fingers by not redeeming it before it expired. She could have used that money to buy a nice pen as a Christmas gift. "Then they (discounts) really are found money."

Keep a trash can handy
It's crucial to understand your own shopping habits. If a coupon is enough to prompt you to run off to your favorite store to buy something you don't need, don't enroll in store rewards programs, says Mike Sullivan, director of education at the credit counseling agency Take Charge America

"You don't want to be tempted by 10 different coupons coming in every month," he says. "If you do it (store rewards programs) correctly, you throw away an awful lot of coupons and an awful lot of opportunities."

Comparison shop
That discount offer in your mailbox or e-mail in-box may encourage you to buy from your favorite store. "One of the great dangers is you don't do comparison shopping," Sullivan says.

Without comparing prices, there's a good chance you'll spend more for the item, just because you want to buy from the place that sent you the discount.

How much will it really cost?
If you do use a credit card for your holiday shopping and carry a balance, you need to be sure to compare the discount you receive against the APR on the credit card, Mark says. You might be getting a 10 percent discount, but your credit card interest rate might be 15 percent.

If you do charge items, Mark urges consumers to have a plan in place to pay off balances before tax time. If not, you'll likely still be paying for your Christmas purchases by the time the next holiday season rolls around.

Marlene Aborn, of Medford, Mass., has nearly perfected the art of using store discounts. Five years ago, she'd get a discount offer in the mail and immediately run out to see if there was anything in the store she liked.

The self-proclaimed shopping nut says her attitude has changed, driven by the economy. Now she looks to see if she can use the discount on sale or clearance items and checks the store's ads to "see where I can get the most bang for my buck."

For those who can't avoid the siren song of store loyalty programs, Mark warns that rather than receiving a reward, you may be rewarding retailers "by spending more than you ever planned."

STORE LOYALTY PROGRAMS: A SAMPLER
Retailers often offer enticements to keep customers loyal repeat visitors. Here are a variety of retailers and the goodies they offer.
Retailer Rewards offered
Best Buy

Get 1 point for every $1 spent in Best Buy's Reward Zone program. For 250 points, members get a $5 reward certificate. There are also birthday rewards and members' only special offers

Borders Rewards

Coupons are sent regularly to members. Every $150 in annual qualifying purchases earns $5 in Borders Bucks, as well as a personal shopping day to save 10 percent on almost everything. After that, it's $5 in Borders Bucks for every $100 in purchases.

Dick's Sporting Goods

Members earn one ScoreCard Rewards point for every $1 they spend. Accumulate 300 points and receive a $10 reward certificate.

DSW

DSW Rewards members earn 10 base points for every dollar spent on regularly priced merchandise and 5 points for every dollar spent on clearance items. Receive a $10 certificate after earning 1,500 points. There are also opportunities to earn double points and bonus points.

Eddie Bauer

In the Eddie Bauer Friends program, customers earn a 3 percent reward for each dollar spent. They receive a reward certificate in $5 increments, depending on their reward balance. Reward certificates are issued every four months.

PetSmart

With the PetPerks program, members receive a welcome kit with more than $200 in coupons, special pricing on more than 1,000 items each month, and access to private sales.

Toys R Us, Babies R Us

Rewards R Us members receive $5 in "R Us Dollars" for every $150 in qualifying purchases. The cap is $20 in R Us Dollars per month. There are also special rewards for diapers, formula, greeting cards and LeapFrog products.

See related: Home-shopping channel addiction: A fast path to credit card debt, Chart: 2010 holiday credit card and debit card special promotions

Published: December 22, 2010


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