Ask John: Retail Credit Cards

'Tis the season to be jolly!!  (Especially if you’re a credit card issuer)

That’s right; we’re just a few weeks away from the beginning of the happiest time of the year…holiday season. That means that an army of people will soon descend on the malls and shopping centers to buy gifts for friends and family. And as with any large school of prey fish, there are always sharks. In this case the sharks are the retailers where we’re spending holiday dollars.   

Rather than gobble you up, the goal of these sharks is to convince shoppers to sign up for a store credit card. You’ll hear the following several times over the next few weeks; “Do you want to use your store card to pay for that?  You don’t have a store card!  You can save 10% on your purchases if you sign up for a store card.”  What a great deal: 10% off of a $700 pair of earrings for your lovely lady or a $500 set of golf clubs for your guy.  That’s big savings! But is it really a worth it? That's a great question to ask:

With the holidays fast approaching, I thought I'd get a head start on my holiday shopping. I've just opened a couple of new accounts and have already saved over $200 on my purchases by doing so.  When I asked if getting the accounts would affect my credit, both of the sales associates at two different stores assured me that it would not.  Since then, I've heard several different opinions and I'm hoping you can shed some light on the subject for me.  I'm planning on purchasing a home next year and hope that this didn't negatively impact my credit. Thank you!

I wish more people would ask me about this (but before they actually open up all of those new accounts). I’m very happy that our reader saved $200 on her purchases but she also may have just damaged her credit to the point where her future home mortgage will be more expensive than it should be.

The problem is that in exchange for the few dollars of savings you also probably damage your credit scores at the same time. When you apply for a new retail store credit card account, several things happen to your credit reports. 

• First, you are giving the store’s credit card division (that’s right, the stores that you are shopping at are affiliated with lenders) permission to look at your credit reports.  That will result in a credit inquiry posted by the retail store.  Each time you agree to allow a store to open a new account in exchange for a discount you are allowing them to pull your credit report.  If you do it five times between now and the end of the year then that’s five new inquiries.  And, this type of inquiry is very likely to lower your credit scores…for the next 12 months.
• Second, each of these new store accounts will end up on your credit reports.  This could wreak havoc on your scores too because for every newly opened account that shows up, you are lowering the overall average age of the accounts on your credit reports.  And there’s nothing you can do about this.
• Third and maybe the most problematic is the fact that you are opening up new “retail store” accounts.  A retail store account is a revolving account just like your Visa or MasterCard account.  That means that it will become a part of one of the most important measurements taken from your credit reports…your revolving utilization.  Since most retail store credit cards have very low credit limits even a few hundred dollars in purchases can make you look highly utilized.  When that happens you can kiss your 750 FICO scores good-bye even if you never miss a payment!
• Fourth, if you’re at a big box retailer buying an expensive flat panel television or piece of furniture in exchange for a “no payments for 12 months” deal you need to be very careful.  You might end up with a stagnant balance that doesn’t move for 12 months, which ends up lowering your credit scores the entire amount of time.  Remember, no payment also means no balance reduction.
• And lastly, be careful that the big box retailer isn’t trying to get you to sign up for store credit with a finance company.  The fact that you have a finance company account on your credit reports can lower your scores regardless of how well you make your payments.  Read the fine print in any of their contracts and see really who the lender is.

So why am I making a big deal out of this?  I’m making a big deal out of this because if you are interested in buying or refinancing a home or car next year then everything you do to your credit reports during the holidays will have an impact.  And, in almost every case your scores will be lower because of it.  Nothing good happens when you’re shopping.  Your balances increase, you’re opening new accounts and you're littering your credit reports with inquiries.  

For example, if your scores are lower by just 10 points your interest rate can jump from 6.58% to 7.39%.  On a $275,000, 30 year mortgage that is a difference of $150 each month.  $1,800 each year.  Saving 10% on those golf clubs suddenly doesn’t seem like such a great idea any longer does it?

If you are already a higher risk borrower and your scores tank because of your holiday shopping then your payment on the same mortgage could be several hundred dollars higher each month and thousands of dollars more each year.  And, in the worst case scenario your holiday shopping can turn you from an “approval” to a “decline.”  But at least you saved 10% on your gifts.

Happy Holidays!!

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