With holiday shopping in full swing, you might be tempted to open a store credit card. Retailers try to entice you with offers of extra savings the day you sign up, exclusive coupons for cardholders, and/or rebates once you spend a certain amount. If you do, you’re not alone.
Credit Karma 2013 member data showed that “compared to the previous January the percentage of new store credit cards more than doubled during the months of November (13 percent) and December (11 percent), signaling the most activity of the year.” And a 2014 poll by Credit Karma found that “21 percent – or one in five Americans– opted for the discount and opened a store credit card at least once over the past two years. Shockingly, 45 percent of these shoppers admit they didn’t consider the impact on their credit or finances when they filled out the application.”
So are retail credit cards a smart idea?
First, as with any credit card, it’s really important to have self-control and pay off the card each month. That being said, store credit cards can be a good way to improve your credit score since you’ll be increasing your available credit. 30% of your credit score comes from your credit utilization rate, or how much you owe divided by how much credit is available to you. It’s recommended to keep your credit utilization rate below 30% for your credit cards individually and collectively. If your credit card has a balance of $1,000 and a credit limit of $5,000, then your credit utilization rate is 20%.
Additionally, store credit cards can help build your credit as 35% of your credit score come from your payment history (i.e. timeliness of payments), 15% comes from your length of credit history, and 10% comes from new credit.
However, retailers are hoping you’ll overspend and carry a balance on their card. This leaves you with dings to your credit score and an overpriced purse or sofa due to the high interest rates on these cards. Plus, these cards are less versatile than a traditional Visa or American Express card since they can only be used at that specific store.
So what can you do if the store cards are burning a hole in your wallet?
First, DON’T close your credit card! Doing so will hurt your credit since it brings down your length of credit history and history of (hopefully) on time payments. Instead, pay off the card and CUT IT UP! Forget that you even have the card and avoid all temptation. Once your account has sat with a $0 balance for some time, your credit with that retailer will be closed and reported as paid in full. This will help boost your score! (But if you really want to close your cards, close the most recent one first.)
Going forward, think twice about opening a new store card. And you don’t want to open multiple cards at once since this will add several hard inquiries to your credit report in a short period of time. A hard inquiry will show up on your credit report and slightly lower your credit score until the inquiry rolls off after two years. It’s OK to have a few hard inquiries on your credit report (we have them from refinancing and buying our car), but keep them at 1 to 2 per year. Any more than that can make you look desperate for credit and lower your credit score further.
And if you’re not sure about your credit score or credit report, you can check for free using Credit Karma. I’m not associated with them or receive any commissions, I just think they have a great tool. Just be aware that they only show your credit score and credit report from one credit bureau. You actually have three! Plus, they keep things free by running ads and offers for new credit cards.