It never fails. Whether I’m shopping for electronics at Best Buy, clothes at Kohl’s or home furnishing at Pier 1, I’m asked if I’d like to save by using my store credit card. And dozens of other retail chains like TJ Maxx, Lowe’s, Hobby Lobby and more, have their name on a credit card. On the surface, those retail cards, also called “branded cards,” sound like a good thing.
But like any ‘good thing,’ too much quickly turns bad.
With retail credit cards, the downfall is, ironically, those flashy discounts. And signing up to save an extra 10 percent (or more) could cost you two, three or more time that in interest fees. Plus, the instant savings associated with a new retail could work against you for months to come because of the hit your credit score could take from the credit check.
Depending on the credit bureau calculating your score, one credit inquiry for a store card can trim 2 to 5 points off your score. That doesn’t sound like a lot, but those points could become precious if you’re applying for a new car loan, mortgage or other type of loan (like another card) and hope for a low interest rate. And should you go on a retail credit-card shopping spree, applying for several cards that come with the offer to save could shave 10, 20 or more points off your score.
It’s true that the new card’s credit limit will be factored into your credit utilization ratio (the amount of credit extended to you compared to the amount of credit you’ve used) but using the new card will increase the amount you owe, too. And should you max out the card, you’ll up your credit utilization ratio even more. The goal is to not use more than 30 percent of all available credit, but racking up debt on a retail card for the extra 10 percent off could throw that.
Branded retail cards also tend to carry interest rates higher than you might have with traditional VISA or MasterCard cards, which if you carry a balance on the card, reduces the amount of the savings you truly cashed in on.
Are you really saving?
I was curious about how cost-effective saving 10 percent at the cash register would save me if I selected a store card as my form of payment. So I crunched the numbers on a sample shopping spree.
Let’s say a store offers 10% off of the initial purchase made on a new retail credit card. If I were to splurge and spend $1000 on a new sofa, the “sale price” would be $900 (plus applicable sales taxes, but let’s omit that for now) which would be charged to my new account. If my new card carries a 21% APR interest rate and I were to pay minimum monthly payments of about $40, that “sale” sofa will cost about $1171; $171 more than if I never opened the card and just paid the full non-promotional price.
The moral of this story: if you don’t have the cash on hand to pay the balance in full, don’t be fooled by the savings offered at the register.
And even if you do have the money to pay the balance in full when the statement arrives, Beverly Harzog, author of “Confession of a Credit Junkie” says before accepting the cashier’s offer, ask yourself these two questions:
Will this card fuel my urge to splurge? If you’re easily tempted to spend or accrue credit card debt, Harzog says a retail card could be problematic. “The temptation of a discount coupled with having access to the line of credit may derail your budget train if you’re an impulsive shopper or trying to increase your credit score.”
Will I purchase a car or house in the next six months? If you think there’s the slightest chance you might be applying for a mortgage or car loan, don’t risk trimming even a few points off your score.
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