YOUR MONEY: Store credit cards usually not a great dealJust about every time I check out at a department or clothing store, a friendly clerk asks, "Would you like to save 20 percent today?" It seems like a no-brainer. But to get the discount, I have to open a store credit card. Would I get a good deal?
By: Kayce T. Ataiyero, Chicago Tribune
CHICAGO - Just about every time I check out at a department or clothing store, a friendly clerk asks, "Would you like to save 20 percent today?"
It seems like a no-brainer. But to get the discount, I have to open a store credit card.
Would I get a good deal?
I asked a few credit experts, and the answer in most cases was no. Here's why:
Let's say you apply for a store credit card to get a 20 percent discount on a pair of $100 boots, saving $20. About a month later you get the credit card bill. If you pay off the $80 balance right away, you're ahead. But if you pay in installments, you'll be slapped with an interest rate of about 20 percent. If you paid a monthly minimum of $10, it would take nine months to pay off the balance, costing you nearly $7 in interest. That cuts your $20 discount by about one-third.
"You might think 'I'm always going to pay off my credit card on time so the APR is not going to have much of an effect,' " said Bill Hardekopf, CEO of LowCards.com, a consumer resource guide on credit cards. "All you have to do is miss one payment or be late on a payment and it can start to add up." And that's just in the short term.
The potential long-term impact can linger long after those boots have worn out. Why?
Simply applying for the card can lower your credit score. If you already have credit accounts or have applied for several cards, lenders can interpret that to mean that you are a poor risk.
Store cards also can torpedo your credit score in another way. Store cards tend to have low credit limits, usually just a few hundred bucks. So even if you charge modest purchases, it looks like you're using a huge percentage of the card's available balance.
Down the road the financial implications can loom large.
"That credit inquiry could take you from Tier A to Tier B lending and can cost you a couple of hundred dollars a month (extra) when it comes time to buy a home or a car," said John Ulzheimer, president of consumer education for Credit.com, a consumer credit information clearinghouse.
"For the sake of saving a few bucks on a pair of boots? It's just not worth it." Jim Sluzewski, a spokesman for Macy's, said the retailer offers consumers perks for using their credit cards, including discounts and advance notices of sales. Sluzewski said consumers have to weigh the potential rewards in deciding whether the credit card is the right option.
"We have an awful lot of consumers who use them for convenience and pay them off every month and that is their process for managing their credit," he said. "I think that a consumer obviously has to make a decision on how they want to use credit."
But is there ever a time when opening a store card is OK?
"If you're disciplined with your money and you are going to pay it off and you haven't applied for credit in a while and the discount is big enough to make it worth the drawbacks. If all the stars align that way, then it might be OK," Hardekopf said. "You just have to do the math."
And he suggests doing the math at home rather than applying for a card on the spot. Read the terms and conditions of the card so you know what you're getting yourself into. And compare the card's terms to other cards to make sure that there isn't a better deal to be had elsewhere.