If you have played a game of credit card poker with yourself it could surely be a sign that you have too many credit cards from too many places. I am a big advocate of having fewer credit cards and establishing a longer credit history with those creditors by upping your credit lines over the years and showing your ability to pay them off regularly. However, I often get asked about store credit cards from places like a Best Buy or a Target and whether it is a good idea to have one of these cards. Do you need a store credit card?
Most the store credit cards that get issued generally happen at the cash register. The smiling face at the checkout counter tabs your bill up and then tells you that if you opened up a store card today that they will take 10%, 20%, or more off of your first purchase. You quickly do the math in your head to calculate the savings and then say, "What do I need to do to get this opened?" It's such an impulse play, that you probably will forget it until a month later when your card actually shows up.
What Are The Pros?
Besides the initial discount, some store cards will continue to offer discounts on certain purchases. Since these stores really only care about getting you back in the store, they will offer special rewards, coupons, and shopping days that will whet the appetite of their most loyal frequent shoppers. Nordstrom's retail credit card, for example, gives its cardholders $20 for every 2,000 rewards points earned. For those of you who drink coffee at Starbuck's, they will give you a free drink for every certain amount of dollars that you load and spend on their GOLD card.
Stores want you to believe that these deals can only be had by those special customers that carry the store card. However, many of the deals that seem really exclusive can be found by signing up on line or just paying attention to when the store runs a promotional. I kind of laugh at places like CVS, who ask me every single time I check out at the register whether or not I have a CVS card. No matter what I say, they still scan the internal CVS deal to get me the best price. Why bother having the card then?
Store cards that bear an American Express, Discover, MasterCard or Visa logo can be used at any shopping establishment that accepts that co-brand. On top of their flexibility, these co-branded cards can have rewards programs that go beyond in-store perks. For instance, the Sears Gold MasterCard allows you to redeem points on round-trip airline tickets, among other items. The TrueEarnings Card from Costco and American Express offers cash back for purchases, including 3 percent for gas and restaurants, 2 percent for travel and 1 percent for everywhere else. (source: www.bankrate.com)
Store cards can help you build your credit history as long as you can make regular payments or pay off the balance of the card. Retail stores habitually have been easier to get a card with rather than going directly to one of the major carriers. They won't offer a huge credit line to you, but this could be a way to have $1,000 or $2,000 of credit especially if you shop at places like Target or Nordstrom on a regular basis. If you and your spouse have only two or three major credit cards, but all of them are listed with one spouse as the 'main' credit holder, one great idea for these store cards is to open them in the other spouse's name. Imagine a married couple that has an American Express and a Visa, both with the husband as the 'main' credit holder. If he dies, it could be tough for the spouse to get credit even though she has been on the account for years. Having the spouse carry one or two store cards can be a very good idea for her (or him) to establish credit in their own name.
Part II- The Cons
The worst part about store credit cards is the usurious type interest rates on the cards. These cards will normally carry an Annual Percentage Rate that is north of 20% and usually closer to 30%. This means that if you can't pay off the balance and like to revolve your credit, you simply need to steer clear of these cards. They will tack on those huge interest rate charges if you don't make your payments on time, and the charges may also apply to new purchases even if you are paying off the existing balance, so be sure to read the fine print. You'll also sign up for a ton of junk mail that you may have not intended to get in the first place. You'll get every catalog, coupon mailer, and internet mailer clogging up your e-mail box and certainly wasting paper. The stores figure that if they got you once, they'll get you back in again to spend more money. Remember, everyone is competing for your money.
As I mentioned above, the credit limits on these cards are less than stellar. Depending on the size of your purchase, your credit limit will normally be somewhere between $500 and $1,500 until you have established a credit history with that particular store. Since most of the major credit cards have reward programs or there are co-branded cards, having a store card doesn't offer a huge advantage unless the perks and discounts are unbelievable.
Last, you could actually lower your credit score by opening up a number of these store credit cards. Since a new application triggers an inquiry on your credit report, it could cost you points on your FICO score, especially if you open a few over a short period of time. Also, some of your FICO score is dependent on the average length of history you have with a creditor, opening more cards can shrink the overall average of your history with your creditors.
Do You Need A Store Credit Card?
Truthfully, I am not a big fan of store credit cards outside of making sure you (and your partner or spouse) are able to establish credit in case something happens within your family. Most people should have two to three cards depending on whether or not they own a business and stick to building a history with these credit card companies. If the savings are significant enough on the one or two major purchases you make then consider opening the store card at that time, and be sure to ask all of the questions about the card and its interest rate so you know what you are getting yourself into when the card comes in the mail.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services
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