A lot of people will have you believe that retail store credit cards are a good way to fix a bad credit score. When you are out shopping for those Christmas present, you just might be tempted by the appealing offers retail stores will promise you in exchange for signing up for a credit card.
“Want to save 10 percent on today’s purchase?” they will ask, as though they are doing you a favor.
But make no mistake: Those retail store credit cards are a bad idea. And in the long run, they will hurt your credit score.
The Dreadful Truth About Retail Store Credit Cards
Store-specific credit cards are promoted as a way to save money on purchases. Cardholders are given a one-time savings, special coupons and access to exclusive events. But you will never save money by opening a retail store credit card.
For one thing, using a credit card means that you are spending money. And if you are using the credit card to buy things from a retail store, you are likely buying luxury items. I don’t know many people who need a pair of low-rise, bootcut jeans from the Gap. So don’t trick yourself into thinking you are saving money. The coupons and special events you receive as a cardholder are meant to entice you into the store so that you spend money.
In fact, simply carrying a store-specific credit card means you will spend more money at the store. Why else would retail stores push these credit cards on their customers? One of the great things about paying with cash is the emotional response a person has when handing over a wad of money. Using a credit card deprives you of this emotional experience, which in turn causes you to spend more money.
Imagine, for instance, that you are planning to buy a $600 leather jacket.
$600 for a leather jacket! That’s a lot of money!
It sure is, and if you had to use your hard-earned cash, you might wear last season’s style and save the $600 bucks. But if you use credit, you can trick yourself into thinking the jacket is reasonably priced.
If I spread the payments out over the course of the next year, I’ll pay only $60 a month. I can afford that!
Okay, maybe you think it is ridiculous to spend $600 on a leather jacket. But my point is that no one is immune to impulses, and if you carry a store-specific credit card, you will be more likely to act on these impulses.
But there’s a bigger reason I’m opposed to retail store credit cards. Despite the advice of so-called credit experts, store-specific credit cards are not a good way to build your credit score. Indeed, these credit cards could hurt your credit score for a variety of reasons.
First, anytime you open a new credit card, a credit inquiry is added to your credit report. Inquiries count for 10 percent of your score, meaning that your score will probably drop when you first open the credit card. Another 15 percent of your credit score is based on the average age of your credit. This means that every time you open a new credit card, the average age of your credit file drops, as does your credit score.
Another 10 percent of your credit score is based on the mix of credit you have. Ideally, you should have been three and five credit cards. If you are limited to only a few credit cards, why waste one on a card that has limited use? Instead, fill these slots with MasterCard, Visa, American Express, or Discover credit cards.
Unfortunately, the average American has about nine credit cards, according to FICO. This is, in part, due to the increasing popularity of retail store credit cards.
And this isn’t all, the amount of money you owe makes up 30 percent of your credit score. We already discussed this. If you carry a retail store credit card, you are going to be more likely to shop at that store. Thus, your outstanding debt will increase.
With 65 percent of your credit score under attack, suddenly that $10 “savings” by opening retail store credit cards doesn’t seem so hot, does it?