Retail store credit cards sure seem like a great idea. Store clerks offer bait their shoppers with a deal that sounds something like this:
“Would you like to save 15 percent on your purchase today?”
Heck yes! most shoppers think.
“All you have to do is apply for a retail store credit card,”
continues the clerk.
Promotional offers like this are all too common. Just about every major store and gasoline chain offers retail store credit cards.
Unfortunately, store-specific cards will almost always hurt your credit score and your wallet.
Let’s start with your wallet. Sure, you’ll save 10 percent—sometimes even 15 percent—when you sign up for the card, but what happens after the one-time discount?
You’ll pay interest, unless you pay this and subsequent bills immediately. And let’s face it: There will be subsequent bills. Why would retail stores promote these cards with discounts unless they know they can eventually make money?
Retail stores know that sooner or later, you will use the card again. Maybe you are in the mood for a little retail therapy. Having retail cards in your wallet will increase your ability to make an emotional busying decision. Plus, you will be more tempted to buy things from places where you don’t have to immediately part with your cash.
So most likely, you’ll pay interest that far exceed the amount of that one-time discount. This is in the retail store’s best interest, but it’s not in your best interest.
Here’s reason to steer clear of retail store credit cards: Your credit score is going to drop, which means you will pay higher interest rates on future loans and credit cards.
One of the best ways to build credit is to responsibly manage three to five major credit cards. This includes American Express, Discover, Visa, and MasterCard, and it also includes cards from places like Chevron and Macy’s.
Three to five is that “sweet spot” where the credit bureaus can judge whether you can responsibly juggle numerous accounts. But it limits your liability. If you have more than five, the credit bureaus worry that you can get in over your head pretty easily.
One of the problems with retail cards is that they usually cause a person to exceed the three-to-five rule. If you are limited to three to five credit cards, why waste one by applying for a card you can only use at one place? You can’t use your Gap card to book a hotel room, so most people who carry retail store credit cards end up with well over five accounts.
These cards hurt your score for two other reasons:
- Every time you apply for a retail store credit cards, you add a credit inquiry to your credit report. This causes you score to drop a few points.
- Keep your revolving accounts active is important, and retail cards are really hard to keep active. After all, you cannot buy a lawn mower from Sears every month. Inactive credit cards don’t tell the credit-scoring bureaus anything about your ability to pay bills on time and manage debt, so they don’t help your credit score at all.
So even if it is the Target RedCard or Kohl’s trying to get you to save a few percent on your purchase, think about the ramifications first, before you sign on the line.
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