Applying for Store Cards: Credit Implications

We are currently in that short period between the back-to-school and holiday shopping seasons, and many people across the country tend to take this time to get a head start on some of the gifts they plan to give their friends in December. However, there is one very common temptation you’ll probably run across in the next few months, and you’ll need to consider all the implications this can come with.

You’ve probably been to a large number of major retailers in your life and been offered a simple choice at checkout: “Would you like to apply for our store credit card to save 20 percent on your purchase today?” At first, this can sound like a great deal, particularly if you’re buying a large amount of items that day, but there can be very serious consequences for doing so if you’re not careful, and these can affect both your overall finances and your credit standing at the same time.

Thinking about the financial implications

The first thing you should think to yourself when you’re asked whether you want to apply for such a credit card is how much the savings will be if you take off that 10, 20 or in some cases even 30 percent from your overall purchase price. Even if you’re spending a lot of money, that savings could be as little as $50, and might not be worth the hassle. But what they often don’t tell you when you’re applying for such a card is that it could come with interest rates well above what you are used to paying on traditional credit card accounts issued by lenders, rather than those granted to you by a store.

That means that if you’re going to be buying more than you can afford to pay back within a month or two at the most, you’re probably going to face some fairly significant interest charges that can make your debt grow pretty quickly, and could create some serious credit problems if you’re now having to add that debt payment to the other bills you face in any given month. That, in turn, can create all kinds of headaches that probably aren’t going to be worth the $50 or less you might forget you even saved several months or more in the past. In addition, these cards also tend to have fairly low credit limits, meaning that they’ll be easier to max out; in turn, that could lead to significant penalty rates and fees being applied to your balance.

How it will alter your credit

Of course, the far bigger concern that you should have about what these store cards can do to you should relate to your credit standing. For one thing, the second you apply for such a card, your credit score might fall slightly as a result of the credit check the store has to run on you (as the number of recent inquiries you make for new credit within a short period of time counts as 10 percent of your score).

In addition, this will also probably hurt what is known as your “credit utilization ratio,” which makes up a total of 30 percent of your credit scores. This factor is made up of the amount of debt you’re using when viewed as a percentage of your maximums across all accounts in your name. So, for example, if this new card has a credit limit of about $500 — and thus bring your total credit limits across three cards to $7,500 — and you make a $300 purchase on it that day in addition to the $3,000 you already owed on the two previous accounts, you now owe $3,300 out of a possible $7,500, or 44 percent of your limits. Previously, your ratio had been about 42 percent. That’s a slight difference, but any amount you owe over 30 percent of your maximums will bring your score down, meaning that you’ll have less wiggle room going forward.

Finally, adding more debt — particularly the kind that comes with a high APR — can put you at greater risk for falling behind on your bills, because that’s just one more obligation you didn’t have before. And because payment history is the single largest consideration that goes into making up your score, at 35 percent, any added danger of missing a deadline should be treated very seriously.

If you’re worried about your credit standing in general, it might be wise to order copies of your credit reports regularly, as doing so may allow you to determine whether any potentially unfair markings are having a negative impact on your ratings. If this is the case, working with a credit repair company may allow you to get these problems sorted out more expediently and expertly than you could have achieved yourself.