If you haven’t already started shopping for the holidays, then you’re probably gearing up to.
Imagine this familiar scene: You’ve expended most of your energy searching for the perfect gifts and finally arrive at the store counter, arms full of items. The clerk tallies your purchases then makes a tempting offer. “Open a (store) credit card today, and you’ll save 20 percent.” If you’re about to spend a bundle, the opportunity to save $20, $40 or even more may sound fantastic. You’ll exchange five minutes of your time to fill out the short application, and bingo, you save cash and are even entered into the store rewards program.
Remember the old saying “If it sounds too good to be true, it probably is?” Before you start the application, take a moment to consider the effect this “deal” may have. A late payment could cost you dearly. Even if you do make a payment on time, the transaction will damage your credit immediately in at least two ways:
Credit Ding #1: Each time you apply for credit, the credit bureaus get a notice, usually lowering your credit score by 5-7 points. Your score recovers fairly quickly if you don’t do this too often, but imagine the effect of applying for retail credit several times in a weekend of holiday shopping. This can put the credit bureaus on high alert that you may be getting in over your head, and your score will drop accordingly.
Credit Ding #2: Using credit cards doesn’t hurt your credit rating, per se. In fact, it’s good for your score to use it from time to time. However, part of how your credit score is calculated reflects how much you owe as a percentage of your credit limit AKA credit utilization. If you have, say, a $5,000 credit limit on a card and you owe $1,000, that’s 20% utilization. Generally, anything over 30% utilization can drop your score.
The problem with retail credit cards is that they are often assigned with a very low credit limit. This might feel like a good way to keep you from spending too much, but it can be dangerous for your credit score. If you’ve just gotten a card from your favorite retailer with a $500 limit and you spend $400, then you’re carrying a balance that’s 80% of your limit. Now, that can definitely ding your credit.
Retail Credit Cards Generally Have Very High-Interest Rates. You may end up paying more in interest and fees by using retail credit cards because they almost always have a rate that’s well above the industry average. If you have good credit then interest rates start at the 20% to 24% range, and if your credit is less than stellar, it could be even more.
Unless you are extremely diligent in paying the bill in full and on time, the interest will add up fast. It’s just not worth the potential point-of-sale savings.
Rewards Programs are Usually Less Than Rewarding – Many retailers add you to a rewards program as part of your credit purchase, offering to give you rebates on purchases and coupons to use in the future. There are two problems with these programs. First, most people never get around to using the full benefits before they expire. Second, if you’re committed to getting into the store to use your rebates, you are likely to end up buying more than you ever would have in the first place. Rest assured, the rewards programs are a much better deal for the store than for you.
Crazed Credit Shopping Means Delayed Holiday Pain. People have joked for years about waiting to pay for their holiday shopping until April. The trouble is, of course, it’s just not funny. Long after the festivities have passed, unwanted gifts have been exchanged, and the most sought-after toy has been broken, the bills keep coming.
More Than Wheels recommends that all shoppers restrict using credit for holiday shopping. If you can budget your spending and pay with cash, by all means, do it. It will help you keep your spending in check, your mailbox free of retail mail, and your credit score on track.