|
||||||||||
It’s a marketing tactic so smooth, you barely notice it. You’re in the checkout line at a major retailer chain, and the clerk innocently asks if you’d like to save 10% on your purchase. In some cases, such as Kohl’s, you will also get the opportunity to win a rebate of $25, $50, or $75 for your purchase. To get access to these instant riches, all you have to do, of course, is to spend two minutes applying for a store credit card.
Compared to bank credit cards, store credit cards with their standard 10% discount on the first purchase may seem like great credit card deals. But viz a viz bank credit cards are they really such a good idea, particularly in the current credit environment? Before you fall for that 10% discount offer, here are five things to keep in mind.
1. Store credit cards counts as a hard credit inquiry. Each time you apply for a credit card, it adds a credit inquiry to your credit report. That will hurt your credit score, particularly if there have been other credit inquires to your account within the last twelve months.
Most financial advisors advise against applying for a credit card more than every six months or so. Store credit cards come with a low credit limit compared to bank credit cards, giving you less bang for your bucks, so to speak, when you submit your application. If you have no need to apply for a credit card for another 6-12 months, applying for a store credit card may make sense. However, compared to a bank credit card, the terms are generally less attractive.
2. Store credit cards lower the average age of your credit accounts. Adding a new credit card lowers the average length of your credit history, which is another factor in calculating your credit score. You can get some sense of how applying for a new credit card would affect your credit score by using this convenient FICO score estimator from Bankrate.com.
3. It may not be as easy to get approved for as it sounds. Retail credit cards used to be a great option for people with bad credit, who couldn’t qualify for bank credit cards, because they were run in-house by the retailer and therefore were easier to get approved for. However, store credit cards are increasingly issued in co-operation with a bank, which means that the approval standards for retail credit cards now are much like those of bank credit cards. And if you don’t get approved, you’re still stuck with the credit inquiry.
4. That 10% savings could get expensive. Retailers aggressively recruit customers for their private label credit cards, because they know that card holders spend more money at their stores. Not only that, store credit cards generally speaking also charge a higher interest than bank credit cards. In short, if you carry a balance or are not a disciplined spender, that great 10 % discount could soon turn into a net loss.
5. It’s not all bad. If you don’t already have a store credit card, applying for a retail credit card may help improve your credit score by contributing to your credit mix, another component of FICO scores. And of course, that 10% promotion might be worth it, if you prepare ahead and make some large, pre-planned purchases on the day that you apply for the card.
In short, if you don’t plan to apply for another credit card or loan anytime soon, and if you don’t mind receiving a slew of mailed promotions from the retailer later on, under certain circumstances applying for a store credit card may be worth it. However, with credit card terms tightening, it’s more important than ever to carefully weigh options and deciding which credit cards to apply for.
