We’ve all been there. You are out the checkout counter of a fancy department store when the cashier asks “Would you like to open a store credit card and receive 10 percent off your order?” On the surface, it sounds like a great deal. Who doesn’t like to save money? Plus, many retailers will offer additional benefits to cardholders, like 10 percent off every time you shop, or even special sales that are only for credit card holders.
The problem is that opening retail credit cards can affect your credit score (yes, even if you pay them off each month), and all the credit repair in the world won’t help if you are constantly adding to the problem. Here is what you need to know:
Regret is Real
According to Today, roughly half of all people who open retail store credit cards regret doing so. “You need to understand all the terms and the potential collateral damage that you might cause yourself,” says credit expert John Ulzheimer. “If you’re going to carry a balance on that new card for even a couple of months, you’ll give back any sort of discount you received at the register – and then some – in the form of interest.”
High Interest is the Norm
The discounts stores offer to people who open credit cards are there for a reason – the stores make money. It is not unusual for a retail store credit card to charge interest rates over 25 percent, even for people with good credit. Stores like TJ Maxx, Staples, Toys R Us, and JC Penney each charge their retail credit card customers annual percentage rates (APR) of 26.99 percent or more. Even Amazon charges its customers 25.99 percent APR.
It All Adds Up
Some retail store credit cards do charge less interest, but the average is still a whopping 23.4 percent APR. “Let’s say, for instance, that you rack up $1,000 in debt on a typical store credit card. You’d pay off the debt after six years, paying $833 in fees, if you paid only the minimum each month,” explains Time’s Money. “On a card with an APR of 15%, by contrast, you’d pay off the debt 18 months sooner and save $463.”
It Hurts your Credit Score
Even if you are committed to paying off your retail store card each month, there are still consequences. For one, expect your credit score to take a hit. According to Forbes, “If you already have a limited credit history, or if you’re straddling the line around 700 FICO, this could potentially move you from ‘good’ to ‘average’ credit and negatively affect your interest rates and credit allowances on future loans (like auto loans, mortgages, and even low interest credit card deals).” The thing is that your retail store credit card is treated like any other credit card when it comes to your credit score. You’ll get dinged for making the credit inquiry, hit for trying to open too many cards in a short period of time, and pinged if your credit utilization rate goes up (that’s the proportion of your credit card balances to your credit card limits).
Options are Limited
Also, just because you can qualify for a store credit card, it doesn’t mean you will actually get a credit card. You will still need good credit to qualify for a store credit card that is co-branded with American Express, MasterCard, or Visa. Without it, or if the retail store you are shopping doesn’t offer a co-branded credit card option, you will be stuck with a credit card that impacts your credit score but has a low credit limit and can only be used at that retailer.
At the end of the day, the 10 percent offer simply is not worth the hit to your credit score, let alone the extra interest you’ll pay and the limitations on how you can use it. If you have questions about retail store credit cards, other things that affect your credit score, or want to know how to repair your credit, contact us. Ovation Credit Services can review your credit report and design a personalized plan for repairing your credit that takes into account your unique credit situation as well as your financial goals.
If your credit score has taken a hit from too many retail store credit cards, we can help with that, too. Ovation Credit Services offers personalized credit help to help get you back on track and get your credit score back to where it should be. Contact us for more information.