You hear it every time you step up to the counter to pay: “Would you like to save an extra 20% on your purchases when you open up a credit card with us today?” I feel a little foolish declining any chance to save money, which is exactly why sales associates phrase the question this way. Who says “No thanks” to saving money? I do, in this case, and here’s why I walk away feeling okay about it.
Even though it feels counter-intuitive to turn down a savings opportunity in the moment, store credit cards tend to be big-time budget busters over time. A store credit card may encourage you to spend far more than you normally would without one. I recently interviewed a former sales associate who worked at an upscale department store in Boston. She said their internal research showed their cardholders typically spent 60% more than they would if they didn’t have a card!
So before you say yes to that 20% off dress, here are six reasons why applying for a retail credit card may not be such a hot deal for your finances:
1. Store credit cards typically have higher Annual Percentage Rates (APRs) than non-retail credit cards. According to Creditcards.com’s 2017 survey of store credit cards, the average APR of store cards clocked in at a whopping 26.38%. To put that rate in perspective, consumers with poor credit scores (649 or lower) in 2017 paid an average APR of 23.46% with non-retail cards…nearly 3 percentage points less! Why the high rates? Retail card issuers often take on higher-risk borrowers so they charge subprime rates to cover losses. And everyone pays that rate, no matter if your credit score’s in the 800s or just barely cracking the 600s.
The takeaway: If you’ve got a good-to-stellar credit, say a FICO score over 700, you can do better — way better — than the dismal APR you’ll be offered with a store credit card, especially if you tend to carry balances month-to-month. Shop around for a card that offers a lower APR that’ll reward your good credit. Someone with terrific credit could get a Platinum Credit Card through Hanscom FCU with an 8.49% APR as of May 2018…that’s three times less what you’d pay in interest on the average store card and over the long term, you’ll more than make up the 20% “savings” on your initial card purchase. If you want that retail card anyway because of its irresistible point program, just make sure you pay it off in full each month to avoid paying the exorbitant interest rates that’ll devour any savings you realize.
2. Store credit cards typically come with low credit limits, which can escalate your credit utilization ratio before you leave the store. Let’s say you get instant approval for a retail credit card that has a credit limit of $300. You purchase a pair of $250 boots the day you’re approved, saving $50 on the purchase with your instant 20% off. Yay! But your credit utilization ratio on this brand-new account has suddenly shot up to roughly 67%. No way! Why is this important? Thirty percent of what makes up your FICO score is your credit utilization ratio, the amount of debt you have compared with your cards’ limits. A good utilization rate is less than 30%, so you can see in our example that those boots are made for walking away — fast! — from a store credit card, especially if you don’t have a lot of available credit elsewhere.
The Takeaway: To keep your utilization rate low on a store credit card, keep your balance less than 30% of available credit. That means if you’ve got a $300 credit limit, aim to carry less than a $90 balance to keep your FICO score happy. Actually, this is good advice for all the credit cards you own.
3. A store credit card will generate a hard inquiry on your credit report. You’re saying to yourself, That’s what happens when you apply for credit, Sherlock. But remember what I said above: store credit cards are typically issued with low credit limits. Every time a lender checks your credit, your credit score gets dinged. So ask yourself: Is it worth that ding, especially if I’m only going to get approved for a couple hundred dollars? Or would you rather save that ding for a card that’ll offer you a higher credit limit with better terms?
On the other hand, if you’re in the process of repairing your credit, a store credit card can be a tool to help you get back in the saddle…like I said above, those high APRs mean issuers can take more risks with borrowers. The temporary point drop in your credit score may be totally worth it to you.
The Takeaway: Keep in mind your credit report is going to include the credit check, so only apply for a retail credit card that you really, really want and will use responsibly. If you’re not a frequent shopper at that store, it might be worth applying for a card at a retailer where you do shop often. Also: avoid applying for a bunch of store credit cards at once – that’ll put you on the fast-track to a much lower credit score.
4. If you don’t get credit approval at the register, you won’t get the discount on your purchase. Remember when the associate said you could save 20% by opening a card that day? Instant approval has a flip side: Instant denial, although they won’t tell you you’ve been denied at the till. I asked a former cosmetics sales associate for a major retail chain what happened when a credit application boomeranged with a No-Go: “I’d tell the customer that they would get a letter explaining that an account couldn’t be opened that day,” she said. “I didn’t have to tell them they were declined for a card, but sometimes they were really annoyed they weren’t getting the discount I mentioned.” It wasn’t her fault and she couldn’t flout policy, so she’d give them free samples to make up for the disappointment.
The Takeaway: If you don’t mind risking that you’ll get a consolation prize of product samples instead of 20% off on your purchase, then the prospect of applying for instant approval might not scare you off. For those of you who’d be mortified to hear, “I’m sorry, we can’t offer you an account today but here’s some facial cleanser for your troubles,” especially if your credit isn’t as squeaky clean as you’d like, think about applying for a store card from the privacy of your home computer. You’ll be offered the same perks you’d get by applying in person — and avoid any chance of public embarrassment.
5. You tend to spend more with a retailer credit card than without one. Members-only coupons, loyalty points, special sale days … all these goodies are marketing tactics designed to get retail credit card holders back into the store, again and again. They’re also designed to put pressure on consumers to spend. After all, who wants to lose their points forever or let a valuable 50% or 60% off coupon expire? Even if you’re on the fence about a purchase, sometimes the allure of getting a “steal” nudges you toward to the cash register, credit card in hand. Without the coupons or points, chances are pretty good you’d keep on walking.
The Takeaway: Only open store cards with retailers where you shop regularly and can use your loyalty points or coupons for items you routinely buy. If you find yourself being lured to purchase items you wouldn’t normally purchase, only because you have points or a coupon, it’s time to learn how to shop with a purpose. It’s never a good deal to buy something you kinda/sorta want, especially if you have little use for it once you get it home.
6. Store credit cards are store specific. When you get a Macy’s card, you can use it at Macy’s. A Talbots card at Talbots. Lowe’s at Lowe’s. They're often called closed-loop cards because you can only use them at one place. More retailers, however, are offering open-loop cards, co-branded with financial partners like Visa, Mastercard, and American Express. You can use the cards anywhere Visa, Mastercard, or American Express are accepted, and they’re usually tied to a points program with the retailer.
The Takeaway: Getting a closed-loop retail credit card can be a breeze, especially if you’ve got good credit, but you’ll have more places to use a co-branded store credit card. If there’s a downside, it’s that co-branded cards are more picky about credit scores and reports, but the plus side is their credit terms tend to be better than regular old store credit cards with APRs nudging 30%. Plus, they tend to be more generous with points when you use the card in their retail outlets for purchases.
Used wisely, a credit card can help your credit score. The trick is to know how a credit card works. For tips on smart credit card use, and for a free comparison checklist to help you choose the right card for you, download our free how-to guide!
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