‘Would you like to put that on your store card and receive 10% off? Oh you don’t have one? You’re missing out on so many saving!’ But are you? We all hear this tried and tested script every time we go to purchase something in a store. So are we really saving or do we end up spending more when we open an account and pop it all on the store card? At this time of year it’s too easy to be sucked in by every offer. So to help you navigate the store credit card proposals I’ve put together my thoughts on the subject.
Beware of Spaving!
The idea of ‘spaving,’ or spending to save, is in my opinion something to be avoided! We are so desperate for the 15-20% off or the coupons that come to cardholders that we spend money to get them. Let me tell you something, the stores have access to the best marketing minds on the planet. They know how to separate you from the cash in your wallet. When it comes to ‘spaving’ they win and you lose almost every time. So if the lure of saving is tempting you to get the card take a breath and say no. Even if you pay more at the cash register, overtime you will pay less.
Before we move on, I know that saying no to ‘spaving’ doesn’t give you the same rush as bagging big savings at the register but it is real savings and real savings help you build real wealth.
Ooo the Lure…
I know plenty well-meaning folks will say ‘I am absolutely only going to use this store card to pay for a big-ticket item and I’ll save my family a lot of money…We get 0 % interest, so even if we pay over time it is not costing us anything!’
Allow me let you in on a little secret…If you are one hour late, yes I did say 60 minutes late making that payment, there is a very good chance your APR (the interest you are charged for the credit extended to you) can jump from 0 to 29.9 in an instant. That’s faster than a Maserati!
If you already have good credit and you have lots of cash and discipline to make sure your bills are paid early every month, then go for it! Everyone else needs to take a pass…
Need more convincing to resist? The APR or interest rate charged by store cards is on average 5% higher than general purpose or traditional credit cards like Visa and MasterCard.
Goodbye Good Credit Score…
When the cashier at the checkout counter asks you, ‘Do you want to save 20% on your purchase today?’ You can respond back ‘Do you want my credit score to drop?’ Okay you may just want to think this not actually say it! But your score could in fact drop just by saying yes and here’s why…
1) Inquiries into your credit tell the credit score calculators that you need credit. Too many inquiries tell them you could be in money trouble if you need access to all of that new credit. So just the inquiry alone could hurt.
Credit inquiries count against your credit score for 12 months! Even a 10-point drop in your credit score could damage you if you are right on the line between a good and a not so good score.
If you actually get the card and use it then more damage can be done. Here is why.
2) Credit Utilization: Store cards often have much lower limits than your standard credit cards (often it’s $200-$500.) If you have a a$500 limit and you charge $400 in purchases- you are using 80% of that available credit. When your credit utilization goes up- you know what goes down. That is another no-no for those elves in the back room calculating your credit worthiness.
Here is what I find so insulting, even if you pay off that card every month, if you come close to maxing it out each month that negatively impacts your credit utilization…Seriously?!!
3) That’s not all! Opening a new card also reduces the age of your credit history- yet another thing the credit score elves frown upon. The age of your credit history accounts for about 15% of your overall credit score. Older is better.
So, if you are in the building phase or rebuilding phase of your ‘credit’ life, then stay away from the store cards they can set you back.
Who am I Really Helping?
Another reason employees look so chipper when they ask if you ‘want to save 20% on your purchase today?’ is that they often need you to say yes. Some retailers have quotas for staff members to hit, others offer bonus cash for employees who sign up new store credit customers. The reason retail store cards are real money-makers for the stores is that cash made from a company’s ‘private label’ or store card often play a positive role in a company’s financial statement. It is a stealth way for them to bring in revenue. That means they are making money on you when that cash could be fattening your bottom-line, not theirs.
If You Just Can’t Resist…
Despite everything I have said, I know some folks who don’t have great credit think a store card can help them build that credit. And I have to admit they have a good reason to believe that. Often times these stores are the only places that will approve you for credit. Some retailers have been accused of being sub-prime lenders to consumers. That means they lend money to people (via these cards) that they know they are not in a position to pay back- at least not easily.
But remember there are other options to building the score. Paying other bills, like cell phone and utilities on time will help. Even getting a secured credit card could set you up for success down the road. If you take out a card, use it once and pay it off immediately and then forgo using it – except for strategic credit building purposes – then do it! But if you think you could waiver from this disciplined approach I implore you to look for another way.