Editorial Policy

Retail Credit Cards and Holiday Shopping: Proceed With Caution

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By Eva Norlyk Smith, Ph.D.
November 17, 2010

With Holiday shopping season just around the corner, retailers are gearing up for the busiest time of the year with new tantalizing offers to compete for shoppers’ attention. One old stand-by sure to return to a check-out register near you is the store credit card offering 10 percent off your first purchase, or possibly an introductory 0 APR offer on purchases.

For many consumers, whose finances are tight following the prolonged economic downturn, retail credit cards may seem more tempting than ever—a way to get the extra cash needed for the Holiday Season, extend payments over several months, and perhaps even save a little extra money. However, before you leap at the opportunity to save that 10 percent on your first purchase or get 0 APR on your purchases, take a careful look at the pros and cons to determine if the benefits really are worth it.

1. Retail cards often feature higher interest rates. Retail credit cards tend to come with higher interest rates, so if you’re planning to carry a balance, they typically are not your best bet. You may be better off applying for a low interest credit card ahead of time, rather than taking out a card in the heat of the battle, so to speak, when you’re more likely to be tempted to use the card to make impulse purchases.

2. Many 0 APR offers on retail credit cards come with retroactive interest clauses. Some store credit cards featuring an introductory period of 0 percent APR, come with a big Gotcha. If the balance is not paid off in full by the end of the promotional period, the interest is applied retroactively on the entire balance. In other words, for a card with a 22.99 percent purchase APR, which is not unusual for store credit cards, you could end up paying 22.99 percent interest on the entire balance back to the date of purchase (minus the monthly payments).

3. That 10 percent discount may not be as great as it seems. It’s also possible that you’re not getting as good a discount as you think you are. Most cards only give 10 percent off on the first purchase (as opposed to purchases the first day), so unless you’re planning to make a big purchase in the store, the discount may not amount to that much.
Further, the fine print might restrict the discount to only certain items, or require cardholders to charge a minimum on the card before getting the discount.

4. Consider the effect on your credit score. Applying for a credit card will affect the “recent credit inquiries” portion of the FICO score, and could potentially draw down your credit score, especially if you’ve had other recent credit inquiries. Opening new accounts will reduce the average life of your credit accounts, too, affecting the length of your credit history, another component of FICO scores. If your credit is excellent and you have no plans to apply for other types of credit in the future, this is less of a problem. However, for people with borderline credit scores looking to improve their credit, opening a retail credit score might not be the best strategy.

(In situations when a consumer has little previous credit history and no other retail credit cards, opening a store credit card may have a positive impact on a person’s FICO score by improving the ‘credit mix’ portion of the score.)

Certainly, there are often good reasons to sign up for a store credit card—if it’s a store you shop at frequently and the credit card offers good perks, for example. But opening a retail credit card just to get the upfront discount is rarely worth it. And if you do decide to open one, make sure to read the fine print and ask about the interest rate, check if there are retroactive interest charges on promotional 0 APR rates, and whether the card features any cancellation fees. This should help make that holiday shopping—and paying the bill afterwards—are less stressful.