The Dark Side of Retail Credit Cards

The prospect of saving 10 to 15 percent (or more) is always alluring — especially this year when budgets are stretched thin. So when you’re offered the chance to postpone the full cost of a pricey new gaming system, tablet or clothing for all those on your list, it’s tempting to open a “brand” store credit card when the cashier asks if you’d like to save on your purchase. But before accepting the discount offer, think twice before saying “yes” and applying for any retail credit cards because the “deal” just might not be worth it.

The instant savings could work against you by denting your credit score and budget. And in some cases, the real motive isn’t saving you money; it’s padding a retailer’s bottom line.

Everything might not be better

Take Macy’s, whose ads have promised “Everything’s better at Macy’s…” But “better” might not be “best” for your holiday budget.

Jennifer Krosche, a former manager at Macy’s, says she was offered employee incentives for completed store card credit applications. “Macy’s would pay employees $5 in Macy’s money, which we could only use in the store, for every new Macy’s charge card application we’d get,” says Krosche. “Other times, it was $5 in “Macy’s Bucks” for every three to five new accounts.”

Macy’s isn’t the only retailer urging employees to sign up new credit cards. Krosche also worked at several other major retailers as an employee and manager, including Banana Republic, and says employees there had a monthly goal of opening five new cards a month. “Any less, and you’d get a tutorial on how to open cards and a “conversation” about why you weren’t [meeting signup goals].” She says the employee who opened the most cards every month won a prize. “As a manager there, I was always coming up with incentives for employees to open new credit cards just to make our numbers.”

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Costly credit points

Instant “savings” can also cost you big for months – even years to come. Every time you apply for a credit card — even the ones at the register — your credit report is checked. And that credit inquiry has a negative impact on your credit score because it creates the appearance that you’re loading up on debt or gearing up to go deeper into debt than you already are. And that makes current and potential creditors nervous.

One credit inquiry for a store card can trim 2 to 5 points off your score. If you take advantage of several offers to save with a new card, and you could shave as many as 20 points off your credit score.

Opening a new charge card will cost you an additional 5 to 15 points, which over time, you can earn back with prompt payment and keeping your debt below 30 percent of all available credit. But if you’re considering a car loan or mortgage in the new year, you’ll miss those lost points if your score dips too low to qualify for a low interest rate.

Assessing the savings

Slashing 10 percent off “instantly” at the cash register could cost you twice that in the long run since retail credit cards usually carry a higher interest rate than comparable non-branded cards like Visa or American Express. So the discounts associated with opening a new retail cards is only worthwhile if you’re able to pay the balance in full as soon as you receive the statement.

For instance, getting 10% off of a $100 pair of shoes, creates a “sale price” of $90. That, plus applicable sales taxes, is charged to your new account that comes with a 21% APR interest rate. If you make the minimum monthly payment (in this case $10) those “sale” shoes will have cost about $107; $7 more than if you never opened the card and just paid the full non-promotional price.

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Before accepting the cashier’s offer, ask yourself:

Can I afford this? If you don’t have the money in hand to pay the charge off in full with the first statement, don’t open the card. You’ll probably spend more in interest than you saved at the register.

Will this card fuel my urge to splurge? The temptation of a discount  coupled with  access to a new line of credit may derail your budget train if you’re an impulsive shopper.

Will I purchase a car or house in the next six months? If there’s the slightest chance you might,  don’t apply for any new credit card account (store or bank) to protect your credit score.

Gina Roberts-Grey is a staff writer for SuperMoney. Her mission is to help fight your evil debt blob and get your personal finances in tip top shape.
Photo: stevendepolo