Checkout Line Conundrums: Should You Get the Extended Warranty? What about the Store's Credit Card?

Be on guard at the checkout line: In all the chaos of holiday shopping season, you can easily get talked into paying extra for some sort of extended service plan you don't want, or into signing up for a credit card that saves you 10% upfront—and then hammers you with fees down the line.

Retailers make tons of money on extended warranties and store-affiliated credit cards. They're offered in "you want fries with that?" fashion by store clerks seeking to pump up profits, and all consumers should know that too many French fries aren't good for them. Even so, there are scenarios in which opting for extended warranties and store credit cards make sense, or at least aren't entirely foolish. What's important is that, after you weigh the pros and cons, the decision is made by you, and not by some pushy salesperson.

Extended warranties are an odd thing. Buying them makes more sense when you have less faith in the product holding up over time—bringing up the question, Why the heck are you considering buying a product that won't hold up over time?

As a WiseBread post says, because of the cost of extended warranties and the unlikelihood of the consumer actually filing a claim, the situation is one in which the house always wins in the end:

To make a profit, the private companies that offer these things need to take in more money than they pay out in warranty claims. And they do make money. The profit margin on extended warranties is reputed to be between 40 percent and 80 percent. Anyone buying an extended warranty is betting against the house.

Everybody's gambling when they buy something, hoping that the thing works and continues to work over time. So when, if ever, is the extended warranty a smart bet?

A CNET post tackles the question when it comes to buying electronics:

Laptops need service about 43 percent of the time after 3 or 4 years, desktops 31 percent, while camcorders and digital cameras very rarely, about 13 percent and 10 percent of the time, respectively. Three to four years is also a really long time when it comes to technology now. And as the cost of laptops and desktops, for example, continue to decline, sometimes the cost of replacing the device isn't that much more than getting it repaired.

When does CNET say the warranty is a good idea? Almost never. The exception is when it makes you feel better (which is totally illogical, but whatever, it's your money, not mine):

Sometimes the extra $200 to $300 is worth the peace of mind. There is definitely a case for buying insurance on something you've spent a lot of money on that you might not be able to afford to replace, should something go wrong a couple years down the road.

A NY Times story, in fact, says that the decision to go with an extended warranty or not actually depends a lot on one's emotional state at the time of purchase. So for many people, it's not at all a question of logic, or even an educated bet:

New research suggests that the appeal of such warranties depends not only the inability of most people to assess risk, but also on the emotional state of the buyer. The happier you are, it turns out, the more risk-averse you become, so the more likely you are to buy the protection…

They also found that people were more likely to buy an extended warranty if they received a discount on the product, especially an unexpected one. The windfall makes people feel good. And a positive mood makes people more risk-averse because they are afraid of losing that good feeling, which makes potential losses look greater.

The lesson is simple: Stay grouchy while shopping.

I can certainly handle that. Just ask my wife.

Speaking of wives, Neal Templin, who writes the WSJ's Cheapskate column has a difference of opinion with his spouse regarding extended warranties. He says no thanks. She says sign me up. Why? Templin explains:

A reader might logically assume I pass on buying extended-service plans. That's largely true. The problem is that my wife likes them.

"Every time I've bought a warranty for something, I've needed it," Clarissa told me. "It's like insurance against life. And life bites."

… And in writing this column, I learned Clarissa took one out on the stove we bought at the same time without telling me. As it happens, the stove has had a problem with a burner that's hard to light. We tried to get it fixed under the original warranty. The repairman went so far as to order a new part, but eventually we were told it was a design flaw, so it's not clear there is a fix short of getting a new stove.

Clarissa and our daughter also browbeat me into buying an extended warranty for a college laptop computer a couple of years ago, and it still bothers me. It cost $300, nearly half as much as the laptop itself. The laptop hasn't had a problem yet. That means that so far, with nearly a year to go on the warranty, it has been money down the drain—at least as far as I'm concerned.

A study from the Journal of Consumer Research gives further insight into the minds of extended warranty buyers.

"Consumers are more prone to buying ESCs for hedonic (pleasure-related) products such as game controllers than for utilitarian products like printers." The authors suggest that hedonic products hold more value than utilitarian products and consumers may expect to keep hedonic products longer. "The pain of potential loss is higher for hedonic products, making insuring the product more attractive," the authors write.

Price promotions also play a role in service contract purchases. For example, when consumers discover an unadvertised price promotion after coming to a store, they are more likely to use the unexpected savings to buy service contracts.

The researchers also discovered that low-income consumers are more likely to buy Extended Service Contracts than wealthier customers. "This is probably because poorer consumers cannot afford to replace the product if it breaks down," write the authors.

I love it: Combining a couple of these findings, what we have is the scenario that people buy extended warranties because they can't live without their video game consoles.

Consumer Reports, whose research was used by most of the articles linked to in this story, says that flatly that extended warranties are almost always bad deals for consumers, and here's why:

Some repairs are covered by the standard manufacturer warranty that comes with the product.

Products seldom break within the extended-warranty window—after the standard warranty has expired but within the typical two to three years of purchase—our data show.

When electronics and appliances do break, the repairs, on average, cost about the same as an extended warranty.

If you're really leaning toward getting the warranty anyway, CR offers this guideline:

Don't pay more than 20 percent of the purchase price of the product for one. Always try to negotiate a better price.

As for that other checkout line question regarding store credit cards, Consumer Reports again says it's best to resist the pitch. The interest rates are high, your credit score will be affected, the cards don't necessarily have the same consumer protection as major credit cards—and oh yeah, you could use the card way more than you anticipated and dig yourself into major debt.

Is all that worth the 10% or so discount you'll get on your purchase for signing up for the card? In rare situations, yes, per CR:

If you frequently shop in the store—and you always pay your bills on time—you may be able to build points towards future purchases, get advanced notice of sales, or gain access to insider sales. But some retailers offer rewards or loyalty programs that don't require you to sign up for credit cards.

The key line to consider before signing up for a store card is: "you always pay your bills on time." Always. If you don't, then don't.