November 30th, 2010 10:10 EST
Don`t Be Fooled by Retail Store Credit Cards This Holiday Shopping Season
Holiday shopping is in full force, and we all know what that means: long lines, crowded malls, Santa, and retail store credit card offers.
But beware: These retail store credit cards are risky!
Stores will trick you into thinking that store-specific credit cards will allow you to save big money.
"You will get a 10 percent discount on your entire day`s purchase," they tell you, adding special incentives like coupons and exclusive offers.
But don`t be fooled. Retailers offer store-specific credit cards for one reason: They know that cardholders will spend more money in their store.
Beware of Retail Store Credit Cards
There are two big problems with retail store credit cards:
- First, they add to the list of things that hurt your credit score.
- Second, you will spend more money if you carry store-specific credit cards.
Your Credit Score and Retail Store Credit Cards
There are four main reasons that retail store credit cards can cause your credit score to drop:
1. You might end up carrying too many credit cards. Your credit score will increase fastest if you have three to five credit cards. If you have more than five credit cards, the credit bureaus will worry that you might overextend yourself. If you have fewer than three, the credit bureaus will not know whether you can manage multiple accounts. About 15 percent of your credit score is based on the type of credit you carry, so if you carry too many or too few credit cards, your score will drop.
If you only have three to five available slots, why waste them on retail store credit cards? Likely, you will end up needing major revolving credit cards, which can be used anywhere, and you will end up with too many credit cards.
2. The amount of money you owe makes up 30 percent of your credit score. In this way, every single credit card that carries a balance can hurt your score if your balance-to-limit ratio is too high. Do you really need to increase your debt so you can buy another sweater? Probably not.
3. Every time you open a new credit card, you lower the average age of your credit file. About 15 percent of your credit score is based on the average age of your credit cards. The older the age, the better your score.
4. Finally, you will add a credit inquiry to your credit report. The number of inquiries you have on your credit report affects about 10 percent of your credit score.
And your credit score is not the only reason to avoid retail store credit cards. The thickness of your wallet will be affected as well.
Your Wallet and Retail Store Credit Cards
You will always spend more money if you use retail store credit cards. Stores know this, which is why they offer the credit cards. You will pay money in interest, you might pay an annual fee, and you will probably buy more that if you were paying strictly cash.
Credit cards have a lot of value, but they do prevent cardholders from feeling the emotions associated with spending money. Think about the difference.
Imagine that you are in the market for a refrigerator. You have a ton of available credit, so you pick a high-end refrigerator, complete with a microchip that adjusts defrost cycles, an LCD touch screen that tells you how old the contents of the refrigerator are, and humidity-controlled crispers.
It is going to cost you a ton, but you figure you can spread the payments out and work it into your budget.
Now imagine that your credit cards were all taken away from you. You had to pay cash.
Suddenly, you start feeling panic. Then reality sets in.
Do I really need a memo pad that tells me how old my food is? I am sure I can get buy with a middle-of-the-line refrigerator.
Paying cash requires that you prioritize your purchases, but using credit allows you to make rash purchases that you will pay later.
Apply this same logic to your holiday spending. Using cash will require you to spend more conservatively. Whipping out your retail store credit cards will not require this same level of control. And the multi-billion-dollar companies that are offering these cards know this.
Philip Tirone is the author of 7 Steps to a 720 Credit Score, which explains how different types of credit, including retail store credit cards, can help or hurt a credit score.