Widespread financial desperation and the zombification of the U.S. banking system has helped to hone the sleazy tactics of many credit card peddlers, especially when it comes to major shopping chains. Understanding how these mass-based fleecing methods work is part of taking control of your finances.
Take a costly example you’re likely to run into this holiday season. You walk up to the cashier with your holiday purchases in hand, or you’re about to check out online. And you get a tempting offer similar to this: “Get an extra 20% discount off your purchase today just for opening a line of credit with us!“
And as icing on the cake, you might even hear, “and there’s no annual fee!” It’s a great tactic designed to appeal to your common sense and often works on even the most skeptical.
Some Stores Make It Almost Impossible to
Say No to Their Sophisticated Fleecing Tactics!
Most major retailers have their own credit card – Target, Best Buy, Macy’s, even Amazon.com have them. And the offers sound like a good deal. In addition to instant discounts on your current purchase, some, such as Target’s REDcard, offer an ongoing 5% discount every time you shop at their store or on their website. Best Buy’s credit card combines bonus points and special financing terms on select products.
At first glance, the 10% to 20% on-the-spot discounts and convenience are tempting. Approval can happen in an instant. Amazon.com claims a response in as little as 30 seconds. But, stay on your toes; all that glitters is not gold! This is especially true when it comes to store cards. If it’s too good to be true, stay away! It’s old advice, and yet “too-good-to-be-true” offers continue to lure in even savvy, upscale shoppers.
Interest Rate Booby-Traps
Are Found in Store Credit Cards
Don’t think for a moment that the retail clerk is offering a discount attached to the approval of their store credit card to be helpful, or because the store needs to move excess inventory. The truth is the store expects to make back a lot more money from you than the current discount they’re offering.
Store cards typically charge high interest rates in the 22% to 28% range on anyone who carries a balance:
In a recent study, Best Buy’s store credit card tipped the scales with an eye-watering APR of 27.99 percent.
Home Depot was right behind at 26.99 percent.
Cards from Staples, Office Depot, and even Men’s Wearhouse (which serves a clientele of generally sophisticated businessmen) carried a 25.99 percent interest rate.
Nearly 20 more cards reflected APRs close to 25 percent.
President of Consumer Education at SmartCredit.com John Ulzheimersays, “This means even if you carry modest balances for just a few months, you’ll easily throw away any discount realized when you opened the card.”
What’s worse, even if you have a stellar credit score, you may be stuck with a sub-prime interest rate, according to Ulzheimer. Part of the reason is the very fast approval process.
Clever Tactics to Separate You from Your Money
Imagine this, there’s a long line behind you at the register and you agree to the tantalizing instant discount. The clerk punches in your driver’s license information and waits for the computer to pull up your credit reports from the three credit-reporting agencies. Her screen reads “Processing… processing… processing…” Meanwhile a dozen impatient customers are looking over your shoulder and getting antsy.
Most stores don’t want this to happen. So they basically short-cut the approval process and grant an account to just about anyone who can sign their name. How does the store recoup its losses from granting instant credit to deadbeats? They charge you a very high interest rate.
Another feature of store credit cards is they often carry a low limit; usually under $1,000 to start. A low limit reduces potential damage to the store if they extend credit to someone they shouldn’t have. After a few months, it’s likely they’ll raise your limit in hopes of you running up a balance at one of those sky-high interest rates.
A Parade of Store Credit Cards
Can Negatively Affect Your Credit Score
In other regards, applying for a store card is the same as applying for credit anywhere else (i.e. auto loan, mortgage, Visa, or MasterCard). Your credit report will show a “credit inquiry,” and you’ll have another account to add to your monthly bill-payment responsibilities.
If you take “advantage” of even just three four store credit cards offered to you during your holiday shopping (or in a single day at the mall), they would all show up on your credit report as “multiple inquiries” over a short time period. Multiple inquiries, especially for store credit, can lower your credit score.
Another thing to watch out for how store cards impact your “credit-utilization ratio,” one of the items used to calculate your credit score.
For example, if a card has a $500 limit and you charge $250 on it, you credit-utilization ratio for that card is 50%. You want to maintain a low ratio; Kiplinger recommends 30% or lower on revolving credit cards. The lower your overall ratio, the better your credit score tends to be.
Are There Benefits to Store Credit Cards?
We don’t want to be misinterpreted here. We do not want government to come in and regulate credit cards further, nor are we accusing anyone of illegal price gouging. People choose to open cards, and many of them are responsible users of credit. Having credit extended to you is a benefit, and that will always come at some cost. It’s up to the individual to decide if it’s worth it – and if he or she can handle it.
Also, for some, a store credit card could be a useful device for building or re-building a positive credit history. Due to the rather relaxed approval process, they can be easy to get, even for someone with no credit history or poor credit history.
The trick is to get only one and NOT apply at every store. That would defeat the purpose of building a positive credit record and the more bills one has, the greater the chance a payment gets missed. In this case, it makes more sense to choose a store that offers many items you use every day, perhaps a department store such as Target or Wal-Mart.
Then keep your credit-utilization ratio low. Pay off the balance each month and don’t carry a balance on a high interest store card.
Once you no longer need a store credit card for this purpose, cancel and close it, and replace it with a normal Visa, MasterCard, Discover, or American Express credit card with better terms.
This holiday season prepare to say “no thanks” to the store credit card offers you receive at the register or online. While you’re at it, check to see if you have any store cards you can live without and think about canceling them. Having too many revolving credit cards could also lower your credit score.
By avoiding store cards, you can keep your credit score strong and healthy, which helps you save tons more money in the long run.