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4 questions to ask before opening a store card

 
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February 24, 2014
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QDear Eva,

It seems that every time I buy something at a store, the clerk promises 10 percent off the purchase price if I sign up for the store's card. That's a pretty good deal, but I don't want a bunch of cards in my wallet. What's to keep me from canceling or cutting up the card after I pay it off? –Elaine

AHi Elaine,

Getting 10 percent off your purchase can be tantalizing, and many people ask themselves that question. In theory, there is nothing that prevents you from signing up for a store credit card, getting the 10 percent savings on your purchase, and then canceling the card after paying off the balance.

However, there is one thing to consider before you take that store clerk up on the offer: What is the cost to your credit? Ask yourself these four questions first.Ask Eva

1. Do you have time to follow up?

First, consider time and convenience. Do you have time to manage an extra credit card? And even though you plan to cancel, will you remember? Many busy people sign up for store credit cards intending to cancel, but quickly forget to follow through.

2. Will you spend more?

Moment of truth: Do you have the self-discipline to refrain from additional purchases? There's a reason why stores push the 10 percent deal so aggressively: Statistically, people with a store credit card spend more!  Will saving 10 percent encourage you to add a few items to your cart? And later, access to an extra $500-$1,000 on that store credit card might tempt you to return to the store to, say, buy that adorable, sexy dress on sale.

3. Will you really save money?

Many store cards carry APRs as high as 24.99 percent. So, unless you're able to pay off that initial purchase right away, that 10 percent savings will quickly get undermined.

4. What will be the effect on your credit score?

Each time you apply for a credit card, the lender does a “hard pull” to check your credit, which results in a few points getting temporarily shaved off your score. Adding new cards can also reduce the average length of your credit history, and if you keep balances on the card, increase the debt-to-credit ratio on your card.

It's hard to predict how much the effect will be, because it depends in part on your current credit situation. If you have excellent credit, the effect will be less than if you have average or fair credit. Canceling the card immediately after you pay the balance may cause a quick, temporary dip to your credit score as you'll have reduced your total available credit (which rose when you added a new store card to your credit mix). However, if your credit is solid, the temporary flux should resolve in a few months.

A word of warning: If you are going to be shopping for a big loan, such as mortgage or car, then I highly recommend against opening and closing credit cards at random as you don't want to take the risk of your credit scores dipping while you're looking to get the best possible interest rate from a lender.

But the more often you apply for credit, the greater the effect on your FICO score. Credit scoring models regard frequent credit applications as a sign of possible financial trouble, because in general, when people need money, the first thing they do is to try to open up new lines of credit. Applying often for store credit cards mimics this pattern of behavior, so frequent applications will have a greater effect on your score than applying every now and then.

This is not to say that you should never take out a store credit card. In some situations, adding a credit card can even benefit your score by adding to your credit mix, particularly if you only have one or two credit cards. But generally speaking, it's best to apply for credit when you have a really good reason for it, and as far as reasons go, saving 10 percent on a purchase doesn't quite make the cut.

Got a question for Eva? Send her an email.


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