Credit Cards That Pay for Holiday Shopping

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NEW YORK TheStreet -- Don't worry frugal, recession-shocked Americans: It's OK and sometimes beneficial to do your holiday shopping with a credit card.

This summer, as holiday savings and layaway programs began, the American Express's (Stock Quote: AXP) Spending and Savings Tracker found that 75% of Americans had either maintained or lowered their debt in the first half of the year and planned to save an average of $12,000 this year. Meanwhile, the Commerce Department noted that Americans saved 5.9% of their disposable income in the second quarter. Even as families with incomes of more than $100,000 increase by 400,000 this year and are poised to contribute an extra $1.1 billion to the holiday season's shopping, according to a survey released yesterday by American Express Publishing and Harris Group, their predicted average holiday spending of $2,093 this year is down roughly 1% from last year.

That thriftiness was evident earlier this week, when the National Retail Federation predicted that U.S. holiday spending would rise 2.3% from last year, to $447.1 billion. While that marks a dramatic improvement from last year's 0.4% rise and 2008's 3.9% downturn, it's still shy of the 2.5% average annual growth during the last decade.

Retailers have played it safe, with Toys R Us renewing last year's "Christmas Savers Club" plan that allows customers to put money on a gift card through cash or credit card payments and earn 3% interest as the holiday approaches. Sears (Stock Quote: SHLD) and Kmart's "Christmas Club" gift card also offers 3% interest (yielding up to $100), but the two chains also focused on layaway programs by extending consumers' payment period to 12 weeks from eight.

Target (Stock Quote: TGT) had offered customers an automatic 5% discount off their purchase when paying with their Target Visa (Stock Quote: V) or house credit and debit cards, but are now offering new applicants for their private-label Target Credit Card 10% off a full day of shopping for signing up, while all cardholders get 10% off a day of shopping for every $1,000 they spend at the store. Banks and credit card issuers, however, are being slightly more generous in wooing holiday shoppers who've been more nice than naughty with their spending and payment schedules.

"There are several cards that offer significant cash back or points during the first three months," says Ben Woolsey, analyst for CreditCards.com, "although they aren't really tied to holiday spending."

Woolsey notes that the Discover (Stock Quote: DFS) Card, for example, offers a $100 cash-back bonus when you make $500 in purchases during first three months -- a 20% holiday discount for those fourth-quarter shoppers counting at home. JP Morgan Chase (Stock Quote: JPM), meanwhile, has a little something for everyone as its high-end Sapphire card offers $100 in rewards (10,000 points) after the first purchase, while its Freedom MasterCard (Stock Quote: MA) gives shoppers a somewhat less generous $100 cash back after they make make $799 in purchases during first three months. Bank of America (Stock Quote: BAC) offers the steepest discount -- albeit on the smallest purchase -- with its Accelerated Rewards American Express. Shoppers get a $50 statement credit when they spend $100 during first 60 days.

Curtis Arnold, founder of CardRatings.com, says the fourth quarter is usually ripe with rewards for shoppers willing to take a chance on a credit card. Last year, for example, Discover partnered with malls across America for its "Receipts into Rewards" program offering cardholders $20 for every $200 spent at mall stores, 20% off at online retailers accessed through its ShopDiscover Web page and 5% off qualifying purchases at grocery stores. Discover says it won't be offering a similar program this year, but is offering 5% off at department stores, clothing stores and restaurants as part of its fourth-quarter promotion. According to Arnold, that's just the least of consumers' holiday options.

"One notable promo that is not specifically noted as a holiday promo by the issuer, but could certainly be useful at Christmas, is the Citi (Stock Quote: C) Dividend Platinum Select MasterCard's 5% cash back in rotating categories -- which just so happens to be at department, clothing and electronic stores from Oct. 1 to Dec. 31," Arnold says. "Sounds like Christmas shopping to me!"

Retailers are hoping it sounds the same to consumers, as the Commerce Department's reported 0.4% uptick in August retail spending has been dampened by faltering consumer sentiment.The Conference Board's Consumer Confidence Index was down 4.7 points last month, while the Thompson Reuters/University of Michigan Consumer Sentiment Index fell 0.7 points.

According to CardRatings, this Is exactly the type of environment that makes cards such as the BankAmericard Cash Rewards Visa Signature Card a viable holiday option. Shoppers get a $50 statement credit just for signing up, but also 3% back on gas, grocery and drugstore purchases for the first six months, with 1% cash back on all other purchases, no restrictions. Banking customers get more of Bank of America's holiday spirit, however, as debit card holders in its Add It Up program get up to 20% cash back at more than 270 online retailers.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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