Every time I shop at a certain store, I’m asked, upon checkout, if I’d like to apply for the store’s credit card and “save 20% off today’s purchase.”
Each time, my answer is no.
Sometimes it’s hard to say no, since the question is phrased in such a way that I feel like I am saying no to saving 20%, rather than saying no to a credit card.
However, I stand fast, knowing the impact a store credit card can have on my credit score and not wanting to have an extra reason to spend money.
Store Credit Cards Can Get You Deeper Into Debt
For people who have debt right now or who have recently gotten out of debt, getting a store credit card is risky and may be a recipe for disaster. Why? Because it makes it all too easy to fall back (or deeper) into debt.
These cards not only have higher interest rates than most other cards (up to 25% or 30%) but they offer a unique challenge to those of us striving to be frugal: they provide the power of suggestion.
Remember, we’re talking about the type of retail credit cards that are offered at department stores like Macy’s, Nordstrom, Old Navy, JC Penney, etc., and at big box stores like Kohl’s, Best Buy, Sears, Home Depot, etc. If you get the credit card of one of these retailers it’s going to make it that much more tempting to come back to the store soon, and once you’re back it will be that much more tempting to buy a lot of items because, after all, you can put it on the card!
In fact, this is the reason the stores love to get you signed up for these cards – it ensures they’ve got a loyal customer who will probably spend more money than they had planned each time they visit the store. So don’t fall for it! If you have (or have had) a spending problem in the past, steer clear of these retail store cards!
Store Credit Cards Can Affect Your Credit Score
Equally important to the debt aspect of these cards is the impact they can have on your credit score. When you apply for a store credit card, your credit file is pulled. This counts as a hard inquiry that will lower your credit score for the first 12 months and will remain on your credit report for up to 24 months.
Why does a credit pull like this affect your credit score? Good question. We’re not completely sure, but it has to do with the formula credit bureaus use to calculate your credit-worthiness.
Anyway, the more important question is: how much does the credit pull hurt your score? Unfortunately, it’s hard to say exactly how much a hard inquiry will affect your score (the algorithms used to figure your score are proprietary), but you can be sure that it will affect your score at least a little bit.
It’s also worth pointing out that if you have a number of inquiries on your credit report in a short period of time, your credit score is impacted more. So, if you go from store to store while you are getting a lot of shopping done, applying for store credit cards to save anywhere from 5% to 20% on your purchases, the large number of inquiries could significantly bring down your credit score.
Do Store Credit Cards Ever Make Sense?
For most people – especially those trying to avoid debt and/or overspending – the store credit cards are more trouble than they’re worth. It just doesn’t make sense to put that kind of temptation in your wallet and walk around with it every day.
However, if you are not troubled by the temptation factor, then in some cases it might make sense to get one – especially if you can save money on a purchase you were planning to make anyway, particularly if it’s a big purchase like a new refrigerator. If you do ever decide to get one, just remember that all the same rules of savvy credit card use apply to store cards: only spend what you had planned, and pay off the balance at the end of each month.
And if you’re already toting a store card with a balance on it, then it’s time to sign up for ReadyForZero so you can start getting that sucker paid off!
What do you think? Have you ever signed up for a store credit card? If so, how did it work for you?
Image credit: stevendepolo