Tis’ the season for store credit card applications.
Yes, with Christmas right around the corner, the shopping malls, outlets and department stores are set to be packed with shoppers finishing up their lists. And whenever there’s an expected uptick in shopping – and sales – volume, it’s common for these stores to roll out enticing offers should consumers apply for and get approved for one of their store credit cards.
But are store credit cards really worth it? Let’s take a look at the various factors that should influence your decision to submit an application in this post.
What’s Your Number?
No, we’re not talking about a phone number, we’re talking about your three-digit FICO score – the number that holds the key to your borrowing potential.
If your score is low, we’d advise you to think twice before applying. That’s because store credit card interest rates tend to be higher, and a low credit score will likely drive that interest rate up even higher (should you be approved).
Think about that: If you have a low credit score, chances are you already have some debt to pay off. Do you really want to dive deeper into debt after making new charges on a store card? Because interest tends to be higher, we’d suggest you apply for one of these cards only if you know you can pay it off each month. Letting balances carry over can cost you, and that’s how these stores make their money on these cards.
On the flip side, store credit cards can be a good way to establish credit and build credit history. However, we’d strongly advise you to have more open lines of credit if you apply for one of these store cards. That’s because of what’s called a “credit utilization ratio,” which essentially is how much credit you’ve used versus how much credit you’ve been approved for.
Ideally, you want to keep this ratio at or under 30 percent or else your credit score will decrease. Generally, these store cards have low credit limits, which can get you in trouble with the credit utilization ratio. Say for instance, that you were approved for a store card with a limit of $500 and you charged $350 to it. If that’s your only line of credit, you’re already at 70 percent of your utilization ratio, which doesn’t bold well for your credit score.
Last but not least, when you apply for any type of credit card, a hard pull on your credit will occur so the lender can check your history. This too can put a small, temporary dent into your credit score.
The Perks vs. Your Consumer Behavior
Fifteen percent off the entire purchase. Quarterly 20 percent off coupons. Special card holders discount shopping days. Zero percent APR for 60 days.
Those are just a sample of the perks that many stores offer to consumers that hold their credit cards. These can be very enticing benefits, especially during the holidays when you’re expecting to spend money on gifts for your family and friends. Why not save where you can? Right, but be sure to consider the other side of things too.
For instance, are there annual member fees? What’s the interest rate on the card? If there’s a promotional interest rate, when will the regular rate kick in? And, perhaps most importantly, how often do you really shop at the store you’re considering applying for a card with?
Like we noted above, store credit cards tend to have higher interest rates than your typical bank or credit union issued cards, so if you can’t pay it off each month, it’s going to cost you more long-term. Annual membership fees are something else you want to take a look at, as is the amount of time you spend in each store per year.
For example, if you’re considering applying for a card from a home goods store, yet only spend about $200 a year there, is saving 15 percent on each purchase – or $30 a year – really worth the potential hassle? On the other hand, if you’re a regular at a hardware store and also do a fair amount of holiday shopping there, the discounts may be worth it.
This holiday season as you head to the stores, be sure to do your due diligence before applying for any store card.
Regards,
Ethan Warrick
Editor
Wealth Authority
