07
Dec

shutterstock_322712354Situation 1: Ever been in a department store ready to check out and the cashier asks you if you want to open a credit card account and get 10% or even 20% off of your purchase? It may be a very tempting offer. But is this a good idea?

Situation 2: You may be trying to build credit if your credit is poor or you are just starting out. If this is you, you may have read that you should apply for a department store or other store credit card because they often have easier qualifying criteria than “normal” bank credit cards. Do they?

Why are Stores Offering These Cards?

Stores are interested in the bottom line, so you can bet that these card programs make them money. The store wants money from the interest charges (they charge some of the highest credit card interest rates) but also hope you come back to the store to buy more stuff. They make money on fees when you’re late making a payment, and some stores card programs allow you to go over your limit, but charge you a fee for doing so. Store employees heavily market these programs. Store employees will often receive commissions or bonuses for every new account they open. The high profit margins are one of the reasons that store credit cards are easier to get — the companies are more willing to take a chance.

Store Cards Have Just as Lengthy Credit Card Contracts as Other Cards

Big banks often run the credit card programs offered by the various retail stores and they have experienced highly paid lawyers writing up their contracts — contracts with very few loopholes for the consumer if they exist at all.

When you’re standing there in the store, the terms of the credit card agreement are often not available, or you may feel pressured to not take the time to read them if there is a line of people behind you waiting to check out. If you can’t read the terms and conditions, it’s not truly possible to make an informed decision. If you want to sign up for one of these cards, do your homework before entering the store; the contracts are probably online. You might also want to read some reviews at Credit.com.

The Hit to Your Credit When You Apply For a Store Credit Card

Every time you apply for a credit card, your credit report gets an “inquiry” placed on it. An inquiry is a marker, indicating that someone requested to review your credit report in order to make a decision on whether or not to give you credit.   Every time you get an inquiry on your credit report, you can get up to 5 points deducted from your credit score. Even if you never use the card, or even if you don’t get approved, your credit score is damaged.

In addition to the mere fact that you applied for this card, if you are successful and get the card, your average age of accounts (15% of your credit score) will be lowered and you will take a hit to your credit score. Also, the credit limits on these cards is often very low — as low as $500. Charge $300 on one of these low-limit cards and you’re way above a 50% utilization rate. Anything above a 25% utilization rate will cause your credit rating to plummet.

The Decision You Have to Make

So you’ve decided to get a store credit card. There are some card programs that are definitely better than others.

Kohl’s

Like most store cards, it offers you a discount on the very next purchase you make, meaning the one you are about to pay for at the register. Kohl’s offers you one of the biggest, 20%, plus you get a coupon for 15% off your next purchase when the card arrives in the mail, plus more coupons for up to 30% off over the next year. If you spend $600 or more a year, you become a Most Valued Customer, entitling you to even more discounts. And there’s no annual fee for this card.

Best Buy

You mostly save on financing fees and free shipping with this credit card. While it does offer 5% back in rewards points, the deferred financing charges make this the most attractive feature. You need to be careful of such offers, though, as if you miss the deadline, you will be charged full interest from the time of the purchase. However, this is a nice same-as-cash feature if you really want the latest electronics but don’t have the cash. No annual fee on this card.

Lowe’s

Lowe’s also has attractive financing options: a 6 month interest-free offer on purchases of $300 or above, 7 year financing at 5.9% interest on purchases of $3500. They also offer 5% back on all purchases in the form of rewards points.

Wal-Mart Credit Card

This is the easiest credit card to get for those who are looking to rebuild. Other perks: cardholders get a free FICO score when they set up their account to receive electronic statements instead of paper ones. In addition, the cards allows you to get up to $100 a day in cash which counts as a purchase instead of a cash-out loan like other bank credit cards that charge extra interest or void the grace period for cash-outs. There is no annual fee for this card.


Posted in Credit, Finance