All year long and especially around the holidays retailers try many different tactics to lure shoppers into spending money. Sales and promotions boasting buy-one-get-one-free or 50% off all previously marked-down merchandise are great ways to save a few bucks, as are free shipping offers, day-long sales events and coupons found online or in your local paper. But what about signing up for a store branded credit card when you check out? Submitting an application on the spot at the register can usually qualify you for a discount of 20% or more off the total amount of your current purchase price which, depending on how much you were already set to spend, can sometimes be a not unsubstantial sum. Can it hurt to take advantage of one of these store credit card offers?
Yes, actually it can hurt – your credit score. Here’s how:
1) Whenever you apply to open up a new line of credit, the credit card company or retail store pulls your credit report to have a look at your credit history in order to determine whether or not you represent a good credit risk. Too many of these inquiries can have an adverse effect upon your FICO score, causing it to drop anywhere between 15 to 30 points. Opening too many accounts in a short amount of time is regarded by credit scoring bureaus as behavior that is exhibited by riskier borrowers, believing those consumers represent a higher risk for falling behind on paying off their debts. Even if you close the retail store card after shortly after paying off your balance, it won’t undo any of the damage to your score that was inflicted by applying for the card in the first place.
2) A retail credit card is typically only good for use at the store you got it from, meaning that you will need to have at least one other multi-purpose card that you can use when you want to charge purchases anywhere other than that one particular establishment. Not only does having a lot of balances spread over several different cards increase the possibility for you to slip up and make a payment late, but it can also upset your credit utilization ratio if one of the cards has an especially low spending limit. The vast majority of retail credit cards have notoriously low credit limits, which means that it does not take a very big balance to give you a high credit utilization ratio. That ratio is something credit scoring agencies factor in when determining your credit score and, in that case, lower is better. FICO examines the combined utilization ratio for all credit card account you have, in addition to the ratio on each individual account
As if all that is not reason enough to steer clear of retail store credit cards, the APR on such cards is often much higher than the national average on general purpose cards. The rewards programs affiliated with retail store cards are limited at best – they don’t offer perks such as cash back or airline miles.
Finally, numerous studies have proven that shoppers spend differently when charging purchases to a credit card as opposed to using a debit card where the amount is instantly deducted from their checking account. Quite a bit more, in fact. A study done by Javelin Strategy & Research shows that, on average, consumers spend $58.29 per transaction when using a debit card in contrast to an average purchase amount of $82.10 with a credit card.
It is always wise to think before you spend, but be absolutely certain that you think TWICE before applying for a store credit card.