It’s holiday season once again! When you are shopping, retail clerks may tempt you with their store’s credit card. “Open the card right now and you can save 15% off your total purchase,” is a common statement. If you have a large purchase, you could save a lot of money. And, you will most likely receive future coupons, sales notices, and special deals. The clerk will also be rewarded for selling you the card. What’s not to like about all this?
Plenty. Here is why I say “No!” to one-store-only credit cards.
The temptation to overspend is too great.
Retailers offer their own credit cards to get you to spend money. Having another card in your wallet is a temptation to spend, especially if the retailer sends you notices about special sales and discounts. Discounts may save money on a single purchase, but would you have bought those items if you were not offered the special price in the first place? If the answer is “no,” you did not save any money. You spent more.
The interest rates are ridiculously high.
An October 2016 survey by CreditCards.com found that “nearly half of retail-branded cards carry an APR of at least 25 percent. That’s much higher than 15.18 percent, the current national average rate for all credit cards.”
This is bad news for consumers who carry a balance. Store card interest rates are typically not risked-based, meaning everyone pays the same rate regardless of their credit scores. Bank credit cards, on the other hand, tie your interest rate to your credit score. The higher your score, the lower your rate.
If you pay for your purchase with a store credit card over several months, you will erode any savings from discounts. This example is from CreditCards.com: if you made a $1000 purchase on a retailer’s card with 23.84% percent interest and made only the minimum payments, it would take you 74 months to pay off the loan and you would pay $872.73 in total interest. If you made the same purchase on a bank credit card with 15 percent interest, it would take you 54 months to pay-off the purchase with minimum monthly payments and the total interest would be $370.46.
It makes no sense to use store credit cards as a way to finance a purchase.
The impact on the cost of credit is too great a risk.
Applying for a retailer credit card can impact your credit, especially when you plan to apply for other loans. While you are standing at the checkout counter waiting for approval for the card, your credit report is getting a hard inquiry. With each hard inquiry, your score is lowered a few points. If you have a high credit score and open one card, this might not impact you very much. But, if you have opened several store credit cards in a short period of time or you have a low credit score, the hard inquiries lower your score.
Retailer credit cards tend to have low credit limits. This can result in a high credit utilization rate, the ratio of how much of your available credit you are using versus how much credit has been extended to you. If you have a $700 limit on your store card and you charge $500, you have a high credit utilization rate of 71%. Your available credit – on each card you have open and across all your cards – comprises 30% of your credit score, making it a good idea to keep your utilization ratio as low as possible.
Hard inquires and credit utilization rates from one-store-only cards have the potential to lower your credit score. When this happens, your interest rates on other loans such as mortgages and auto loans will be higher. Depending on the size and length of the loan, this could cost you thousands of dollars over the life of the loan.
If you want to open a retailer credit card, consider it when:
- You do not plan to apply for a mortgage, auto loan or other long-term loan in the near future, and
- You have a low credit utilization ratio across all your credit cards, and
- You shop regularly at retailer whose card you plan to open, and
- There is no annual fee, and
- You will pay off the balance in full every time you receive the bill.
This blog is published to provide you with general information only, and is not intended to provide specific or comprehensive advice. Money Care, LLC encourages individuals to seek advice from competent professionals when appropriate.