Getting a deal during the holidays is an American tradition. So when a sales clerk cheerfully asks, “Would you like to save 20 percent on your purchases today by opening a card with us?” it fits right in.
But the reality sounds a lot less cheery: “Would you be interested in a low-limit card that could damage your credit standing?”
Credit expert John Ulzheimer warns that opening a new store card could hurt your credit score by:
- Having an outsize impact on your credit usage, which is a big factor in credit scores;
- Causing an inquiry on your credit;
- Reducing the average age of your credit accounts.
Lower limit, higher usage. The credit limits on retail cards that you use only at one store or chain are typically about 10 percent of those on comparable general-use credit cards, Ulzheimer says.
Let’s say you open a store card to get 20 percent off a $250 purchase. After the discount, your balance is $200. A few days later, you spend $150 more. You’re still well below the card’s $1,000 limit — but your balance is 35 percent of your credit limit.
How much of your credit limit you use has a major influence on your credit scores. The only thing that matters more is paying on time. Credit experts advise staying below 30 percent of the limit on any card. Consumers with the very best scores typically use less than 10 percent.
Inquiries and lower account age. A retail card doesn’t just affect your scores by spiking your credit usage. The new account causes the average age of your credit cards to decrease. Credit age is a minor factor in scores, but every point counts. The worst decision of all might be to apply for card after card as you shop to snare multiple discounts.
Limited usability, limited services. On top of potentially hurting your credit scores, retail cards have usability issues. They’re good only at one store or retail chain, usually have high interest rates and typically have less robust security alerts than traditional cards. You might be better off using an existing credit card, especially if you have a rewards card that offers cash back on every purchase, not just the initial one.
AVOID SNAP DECISIONS
If you shop at a particular place often enough, it might be worth opening a store card to access ongoing discounts, presales and insider benefits. But resist deciding that in the checkout line. Research the terms to see if you are comfortable with them.
And if you already have a store card, don’t close it — that also would hurt your average age of accounts. Better to use it lightly and pay on time.