Paycheck Chronicles

Would You Like to Open a Card With That?

I recently needed to make an expensive purchase in a department store.  It was a need, not a want, and I had carefully researched and planned this spending.  I took my time in the store, made a good choice, and went to the register.  There it hit me:  the store credit card promotion.  Due to the nature of my purchase, I got to wait at the register for about 10 minutes as they took care of some details.  In attempt to pass the time, I picked up the credit card flyer.  Keep in mind, I don't do store credit cards.  I have three general cards, one that we use just for gas, one for everyday purchases and one for emergencies (like if my wallet with the other two cards is stolen.)  I don't want any more cards cluttering up my credit report, I think that store cards tend to have awful interest rates, fees and other costs, and I choose not to have a card for myself.  But that slick brochure, with descriptions of the benefits, very nearly made me break my own rule.

So what, you might ask?

First, I have to say that there are benefits to store-specific credit cards.  They are easy to obtain, which might help someone without any credit history build a positive credit report.  They limit the amount of trouble you can create because they usually have lower credit limits and they can only be used in one (or a few) stores.  They often offer benefits such as sale prices, rewards programs or other bonuses.  Sometimes they even offer "same as cash" offers, which can be helpful if you are making a big purchase such as a large appliance or electronics.  Store credit cards are seductive - they look wonderful!  But what are the downsides?

  1. Opening a new account will negatively affect your credit score.  Even if you use it once, pay it off, and close it, your score will drop.  One or two such transactions won't have a huge effect, but repeated credit checks make your report look bad.  It is true that opening new credit will decrease your used credit to available credit ratio, which may improve your score a bit, but I still don't think it is worth it.
  2. The administering company might not have good customer service.  Most store cards aren't run by the stores, they are run by other companies.  Even if the store has outstanding customer service, the company that runs their credit accounts might be awful to deal with.  Most stores will not offer any actual "service" on these accounts, other than to take payments.  Co-branded cards are Visa or Mastercard accounts that are affiliated with a particular store.  Unfortunately, they are usually affiliated with the larger, expensive credit card companies.  In that case, you would probably be better off getting a high quality Visa or Mastercard elsewhere.
  3. They nearly always have very high interest rates.  I've seen rates as high as 28%!  The average department store credit card charges about twice the average major credit card.  It will only take a month or two of not paying the balance in full to make the interest more than any discount that you've gotten for opening the card to begin with.  In addition, late fees and over-limit fees on both store cards and co-branded cards are typically much higher than fees on a good bank or credit union Visa or Mastercard account.
  4. Store card programs are designed to encourage spending.  From sending special "coupons" to creating alluring rewards programs, the stores' marketing departments first try to increase sales from existing customers.  Stores know that customers paying with credit spend more than customers paying with cash, and using your special store card seems to increase spending even more.
  5. More credit accounts presents more of an opportunity to miss errors or fraud.  Do you have an old card that you never use but haven't closed?  Would you know if it was being fraudulently used?  Does the company even have your current address or other contact information?  Open accounts that aren't being used will help keep your credit score high, but not if someone is using them without your knowledge.  Also, credit bureau fraud department are more quickly able to notice fraud when your report is simple and clean:  unusual activity is pretty obvious when you've only got one or two major credit cards on your report.
  6. Store card rebate or reward programs rarely beat good bank or credit union rebate or reward programs.  There are exceptions, of course, but I still haven't found a store reward program that beats the cards I have now.
  7. More credit accounts means more actual bills to pay, and that means more work for you.  Ever misplaced a bill in a pile of mail?  It is easy to do, and even easier if you've got stacks of bills, sales flyers and other mail coming in every day.  The less mail you are receiving, and the fewer bills due each month, the lower the chance that something will slip through the cracks.

I know that there are certain instances in which a store card is a good choice for an individual.  I have chosen to stay away from them because I have very carefully selected the credit cards I carry, and I am confident that their low rates, excellent rebate programs and positive customer service can't be beat.  In the end, I passed on the store card, not because I could think of all these smart reasons but rather because I didn't want to break my own rule about department store cards.  And you know what, I think that is the most important thing I learned.  There was a good reason why I have that rule, and I'm glad that I stuck with even when faced with all the glitz of the rewards available.  Trusting my own decisions was a smart idea!

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