“Want to save an additional 15 percent on your purchase today by signing up for our store card?” It’s the eternal question for retail shoppers these days. The bigger question is whether a discount card is worth the time, the effort, the credit impact and the potential added cost. Retail cards are easy to obtain and can help you establish credit when other lenders won’t take a chance, but you pay for it with annual percentage rates that can be as high as 25 percent to 30 percent, according to Consumer Reports. Before you apply for a store credit card, ask yourself these four questions:
Can I pay off the balance?
It may make sense to take advantage of a bonus signing discount for retail and department store credit cards, but not if you pay for it and then some in interest charges. So sign up for a retail card only if you plan to pay off the balance within a month or two. If you aren’t sure you can pay off the balance quickly, or if there is any chance you will be late with a payment, stay away from retail cards. Late fees can quickly increase your balance, and late payments can drive up your interest rate.
Do the perks add up?
For consumers who make the most of them, certain store credit cards can offer generous benefits beyond the signing bonus. But weigh each carefully. For example, some retailers regularly offer valuable coupons and rebates to cardholders. But coupons serve to lure customers back into the store to spend more on your card. Since many stores have cards with APRs as high as nearly 25 percent, it’s impossible for individuals carrying a balance to come out ahead.
Do I really understand the terms?
Of the most enticing retailer offers, one is the deal that promises no money down and zero percent interest for 6, 12 or 18 months. To be sure, it’s a great option if you are making a big purchase that you can otherwise afford to pay off within the given time-frame. If not, beware. One missed or late payment will immediately change your interest rate, often to the highest and most exorbitant APR. If you fail to pay off the debt before the end of the zero-percent term, you will be charged interest retroactively from the date of purchase.
How will it affect my credit?
Have you ever signed up for a credit card just to get the discount, then paid off and closed the card right away? This may seem like a savvy move, but holding a card for a short period of time can actually hurt your credit score, and retail cards can negatively impact your credit in more ways than that. Each time a retailer inquires about your credit history before granting you a card, your credit score takes a small hit. When stores do extend credit, they typically offer low limits. If you get a $600 limit and spend $400 immediately, your debt-to-credit ratio on that card already exceeds 60 percent. A debt-to-available-credit ratio above 35 percent on a card can negatively impact your FICO score. Apply for too many cards at once and you may do some real damage. It’s best to stay away from department store and retail credit cards when you are working on cleaning up your credit or improving your score in preparation for a major purchase like a car or a home.
SPI Reflections Blog
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