The Department Store Credit Card, Is It Good or Bad?
The cashier asks you during your check out if you would like to open a credit card with them and save 5, 10, or even 15% on your purchase. I know this credit card can be very tempting once you start thinking about how much you can save each time you shop there. But then again, will you start shopping there because of the discount instead of actually needing the item? If you were asking me, the answer would be yes, which is why I have very few credit cards, and none of them are for a store. The question of whether or not to open a store credit card always comes up in client meetings, so I thought I’d share some insights on the topic.
To start with, there is good credit and bad credit. Good credit is useful credit such as a mortgage to purchase a home, a loan for a business startup, or college loans to advance your career. Some of these things may only be obtained with the help of credit and loans. On the other side of the spectrum, there is bad credit or excessive credit used to pay for vacations, clothes, restaurants, you typically can’t afford. When you open a credit card, they give you a cap on your spending limit, but they also adjust that cap higher and don’t even need to tell you. So it can be very tempting to use your extra credit at such a low interest rate to start spending like it’s going out of style.
Try to resist this urge! It is not beneficial to start carrying a balance on your credit card even if the first few months the interest rate is at zero. Even a small balance can hurt your credit score, so please try to pay off your balance every month. If you do start carrying a balance, try to pick away at it every month, and definitely, don’t add to it. It can be a risky cycle once your credit debt starts accumulating. Usually the interest rates on credit cards can be very high, 19% or even 20%, which can be hard to pay off once it gets out of control. Look at the different interest rates, and pay down the debt at the higher rate first before the others.
Now that your balance has been paid, should you cancel that credit card? Usually it will hurt your credit score if you cancel a credit card. The credit bureaus like to see a high available credit amount compared to the credit being used. This is known as the balance to limit ratio or credit utilization ratio, which is technical, credit bureau language. However, if someone has a good credit score, the effects of closing a credit card can be minimal. So if it gives you piece of mind go ahead and cancel it, but don’t cancel more than one at a time or one per year. A closed account with no credit balance and no negative information related to it will stay on your report for ten years from the time you close the account. It’s like a good friend, who is always there to boost your moral. We want the good credit information around the longest just like we want a good friend around for a long time.
Just to give you an idea about what stays on your credit report, there are two categories to think about, your good credit and bad credit information. Good credit information stays on a credit report in definitively. Bad credit stays on a report for 7 years, which is similar to dealing with an ex for 7 years after a breakup. Not a great idea since it makes it harder to move on to another relationship (or keep your sanity) or with credit, to get a new loan for a car.
I’ve heard friends say they will open that Macy’s credit card for the discount since they can always cancel it after. Instead, when you are asked to open a department store credit card, think about your current credit situation and if it is really worth the extra discount. I wouldn’t recommend getting into the downward credit spiral since it will probable only get your farther from your financial goals. Plus it’s no fun being tied down by your credit score when you’re trying to buy a house or get a new car. And remember, even if you buy a handbag at a great discount for $200, you are still paying $200. You aren’t actually saving any money, as my mother and I would try to convince my dad after our shopping sprees.
Jessica Weaver, CFP®, CDFA™, CFS®
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jessica Weaver and not necessarily those of Raymond James.
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