In the first part of this series on store credit cards, we saw why chain executives want you to apply for them. By having a store credit card, you develop loyalty to the chain. You’ll also buy more “stuff” from the chain’s stores because you’ll pay for the merchandise with credit instead of cash.
All this is great for the chain, but not for you. Why? Because applying for — and having — a store credit card can hurt you by lowering your credit score and draining you financially.
Hurting Your Credit Score
Store Credit Card Trap
Fair Isaac Corporation (recently renamed FICO™) creates credit scores, called an FICO™ score. Most lenders use your FICO score in deteremining how risky it is to give you a loan. FICO scores range from 300 to 850:
- 700-850 — very good to excellent
- 680-699 — good
- 620-279 — OK
- 581-619 — bad
- 500-580 — worse
- 300-499 — worst
If you have a bad credit history, and you’ll have trouble getting a loan. And if you do manage to get a loan, you’ll probably pay high interest on it.
What’s your FICO score got to do with store credit cards? Several things.
Applying for a Store Credit Card Can Lower Your FICO Score
Each time you apply for a store credit card, the cashier runs a credit check on you. And each credit check lowers your FICO score a few points. So the more store credit cards you apply for, the more points you lose on your credit score. Having too many outstanding balances on multiple store credit cards raises red flags to lenders. Also applying for too many rewards cards within a short period of time — such as Christmas season — raises red flags. Those red flags make you appear as a poor credit risk.
It’s especially important not to apply for a store credit card — or any other kind of credit card — within a year before you apply for a house loan or other major type of loan. Applying for the card could jeoardize getting your loan. Sales associate doesn’t tell you that when they ask you if you want to sign up for a rewards card. In fact, they probably haven’t a clue that might happen.
Getting Declined for a Store Credit Card Lowers Your Credit Score
Getting Rejected Can Hurt Your Credit Score
Sometimes a sales associate will entice you to apply for the store credit card by saying that even if you get declined you’ll still get the discount. Some people know they’ll be declined, but apply anyway just to save the 10% discount on the transaction. Big mistake! Getting declined for a charge card lowers your FICO score even more than applying for a card.
Closing a Store Credit Card Can Lower Your FICO Score
Sometimes a sales associat might tempt you into applying for a store credit card by suggesting you pay off the bill and then cancel the card. That way, you can still buy the item and get your 10% discount.
Doing that is a big mistake.
Part of your credit score is determined by the total amount of credit available to you. By getting approved for the store credit card, you just increased your total credit limit. But if you cancel the card, you’ll decrease your credit limit, which will lower your credit score. And canceling more than one recently approved rewards card or other kind of credit card will decrease your score even more.
Canceling a store credit card doesn’t wipe that charge account off your credit records. Instead, the charge account remains part of your credit history for seven years.
Getting a New Store Credit Card Decreases the Average Age of Your Credit History
Part of your credit score is based on the average length of your credit history. If you’ve had a credit card for ten years, you have a long credit history. But getting a new credit card shortens the average length of your credit history, which also lowers your FICO score. And the more credit cards you get, the shorter your credit history becomes, and the lower your credit score drops.
Store Credit Cards Have Low Credit Limits
Most store credit cards have low credit limits — say, $500 or $1000. Unlike traditional credit cards, which usually have much higher limits, it’s easy for you to approach the limit on a store credit card. But when you approach your credit limit, you can lower your credit rating. If you approach your credit limit on several credit cards, your credit rating will drop even more.
Paying High Interest Rates
Many store credit cards charge higher APRs — Annual Percentage Rates, or interest rates — than traditional credit cards such as Visa, MasterCard, or Discover. According to The Simple Dollar, many store credit cards have a high APR of 22.99%. Some rewards cards go even higher.
High Interest Rates = Financial Problems
One reason corporate executives push their store credit cards is because many card holders don’t pay off their rewards cards every month and have to pay interest on the balance left on their cards. True, the recession has motivated many of people to pay off their balances and others to simply stop paying. But many of people are still carrying over balances and paying the interest on those balances. And many people are still applying for — and receiving — a store credit card.
Many people apply for a store credit card just to get the 10% discount. Then, instead of paying off the bill when it comes due, they carry the balance over to the next month. By carring over the balance, though, they allow the high interest rate to eat up the 10% they saved. The only way to keep the savings is to pay the balance when it comes due.
Store credit cards also tend to have very low minimum payments. So if you pay the minimum rate, it could take decades for you to to pay off the credit card balance.
Let’s take a look at some store credit cards and how they can hurt you.
Home Depot
Home Depot offers a store card with no annual fee and an APR between 17.99% and 26.99%. The APR you get is based on your credit worthiness. In the fine print, though, Home Depot says that less than 50% of the people who apply for their store credit card will get an APR of 25.99% or higher. So over half the people who qualify for their card will pay an annual interest of 25.99% or more. That’s quite a high rate! And even Home Depot’s lowest rate of 17.99% is pretty high.
Home Depot doesn’t say anything about minimum monthly payments, except that they are “low.”
As an enticement to spend at Home Depot, the chain offers a special promotion: a six-month grace period of no payment, no interest. But only if you charge $299 or more on your card in a single transaction. Home Depot places no limit on the number of $299 transactions. But in the fine print Home Depot says that if the you don’t pay off the $299 by the end of the promotion, you’ll be penalized. The same holds true if you miss a payment.
Spending $200 to save around $40 doesn’t sound like a good idea to me. It is a good idea, though, to the executives who run the company.
WalMart
WalMart offers a store credit card with no annual fee and a flat APR of 22.90%. You also can save 3¢ off the “regular street price” of gas if you fill your car up at one of WalMart’s participating filling stations. I couldn’t find any specific information about minimum monthly payments.
WalMart also has a promotional offer of no payment and no interest for six months on an initial purchase of $299.
Kohl’s
Kohl’s offers a store credit card with no annual fee and a variable APR — currently 21.9% — which the company determines quarterly. Kohl’s also offers 10% off your first day’s purchases. I couldn’t find any specific information about monthly payments.
As an extra enticement, Kohl’s offers you “extra discounts on everything 12 times a year,” which lets you “[s]ave as much as $120 annually.” But in the fine print they add that the $120 figure is “[b]ased on shopping all events with average purchases of $100 each and average additional savings of 10%.” So to save $10 a month, you have to spend $100 a month. Some deal!
TJX
TJX offers as store credit card, called a TJX Rewards™ Card, with no annual fee and a variable APR, which currently is 21.99%. You get 10% off your initial purchase. For Every $200 you spend at Marshalls, TJMaxx, HomeGoods, and A.J. Wright, you get a gift certificate for $10. I couldn’t find any specific information about monthly payments.
Is there a better alternative to store credit cards and bank credit cards, all of which have high interest rates? You bet there is. And I’ll talk about it in my final post in this series.
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Tags: credit score, FICO score, rewards card, rewards cards, store credit card, store credit cards
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