As the holiday season approaches, you are about to be inundated by offers to open retail store credit cards. But open retail store credit cards at your own risk!
Retail store credit cards almost always come with enticing offers. Clerks promise you big savings on the day’s purchase. “Open a card today, and you will save 15 percent,” they tell you.
They go on to promise future savings, “Each Tuesday, cardholders are given an extra 15 percent off everything in the store.”
And then they promise exclusivity, “We open the store early for cardholders, so they get early access to all of our sales.”
All these offers sound great, but let’s use common sense. Stores offer retail credit cards for one reason and one reason alone: They know that you will spend more money if you carry a store-specific credit card. In fact, the “savings” offered to people who sign up for retail store credit cards is just one more rip-off on the long list of scams designed so that banks can make more money in interest.
Beware of Retail Store Credit Cards
Let’s consider two big downsides to retail store credit cards:
1. You will spend more money if you open a store-specific credit card.
2. Your credit score could drop.
There are no two ways around it: You will always spend more money if you use credit cards. For one thing, you will pay interest. And even if you do manage to pay your bills in full before the interest accrues, those retail store credit cards might come with an annual fee.
Even if you somehow avoid paying fees or interest, you will spend more money by carrying a retail store credit card simply because you will buy more from that store than you would if you paid in cash.
Credit cards prevent you from feeling the emotions associated with spending money. As a result, you will be more likely to buy things—things you probably do not need—if you use a credit card.
Think about how you felt the last time you bought an expensive item using cash. Now compare this to how you would have felt if you had paid credit.
Paying cash requires you to budget, save, and prioritize expenditures. Using credit allows you to postpone, rationalize, and spread payments out. Let’s say you are buying new living room furniture that will cost a grand total of $2,000. If you pay cash, you might agonize over the purchase.
Can I afford it? Is there a cheaper option? Should I wait until I have more money in savings? Can I make do with the ragged old couch I have now?
If you use credit, the conversation you have with yourself will be different.
Sure, it’s expensive, but I can spread the payments out. $2,000 isn’t that much if I spread it out over 36 months.
Now think about your holiday spending. If you use cash to finance your holiday gifts, you will probably be a little (or a lot) more conservative. You will definitely have to create a budget to make sure that you can afford the gifts you buy for your friends and family.
Whipping out a credit card will not require this forethought. And the multi-billion-dollar companies that are offering retail store credit cards know this. Unless you are highly disciplined, you are not going to beat them at their own game.
Retail store credit cards have another downside: they can hurt your credit score for several reasons.
1. You will add a credit inquiry to your credit report. About ten percent of your credit score is based on the number of inquiries you have on your credit report. When you apply for retail store credit cards, new inquiries are added to your report, and this causes your score to drop.
2. You will lower the average of your credit cards. Another fifteen percent of your credit score is based on the average age of your credit cards. Each time you open a new credit card, the average age of your accounts drops, as does your credit score.
3. You might end up with too many credit cards in your wallet. Credit-scoring bureaus will respond best if you have three to five credit cards. In fact, another ten percent of your score is based on the “mix” of credit you have in your wallet. If you have too many credit cards, they start to worry, and they assign you a lower credit score. After all, the more credit you have, the more likely you are to dig yourself a financial hole. The three-to-five rule allows you enough credit to be judged creditworthy, but not so much that you seem irresponsible.
If you are like most Americans, you already have three to five major revolving credit cards that can be used most anywhere. If you add a store-specific card to the mix, you might just see your credit drop.
Add these three factors together, and about 35 percent of what makes up your credit score can be harmed by retail store credit cards.
And that’s not all. A whopping 30 percent of your credit score is based on the amount of money you owe. Since we know you will spend more money if you carry retail store credit cards, we can assume you are going to owe more money. And this is bad news for your credit score and your wallet.
Philip Tirone is the author of 7 Steps to a 720 Credit Score, which explains how different types of credit—including retail store credit cards—can help or hurt a credit score.