Reader Mailbag

Every time we send out the weekly blog email, we invite our readers to send ideas for future posts our way.  Every now and then, a reader takes us up on that! 😊

Here’s one question that we’ve been meaning to answer for a while (but were waylaid by one of the craziest market cycles in history!):

“I just bought some lawn stuff from Home Depot.  They offered me $100 off if I applied for a credit card.  Would this be a good thing to do?  What does Home Depot get out of it?  How many cards should I have?  How does this affect my credit rating?”

Excellent questions—and even I fall prey to this pitch; ironically this weekend, this happened:

In my defense, the sales clerk asked me if I wanted to “join the club and save $50”—she did not offer—nor did I clarify—what exactly I was signing up for.  And, now I have a new Mastercard.

From a big picture, store credit cards are not all bad.  Stores love them—they tend to encourage shoppers to spend more per visit, and card holders tend to visit more often to get more rewards/savings/points.  Store credit cards encourage brand loyalty and discourage price comparison shopping.  So, retailers want you to have their card in your pocket!

But, there are some good reasons why a store credit card would make sense:

1. Discounts—cards like the Target RedCard, which offers 5% on every Target purchase, can make sense if you are already a loyal shopper at a store, and are disciplined enough to pay your balance in full every month.
2. Easier access—store credit cards typically come with lower limits, and most have lower underwriting standards. Additionally, store credit cards report to the three main credit bureaus.  So, if you are looking to start or rebuild your credit and cannot get approval for a traditional card, then a store credit card may be a good first step (again, provided you pay your bill in full every month).
3. Other perks—free shipping, early access to sales, extra return time are common perks of a store credit card.

Generally, loyal shoppers that pay their store credit card bill in full every month may benefit from one of these cards.

On the other hand, retailer credit cards:

1. Have high fees—annual fees, late payment fees, and high interest rates make these cards awful cards to carry a balance on…you may end up spending more in fees than you earn in rewards
2. Low credit limits—this can be a problem if you carry a significant balance on a low limit card. If you use more than 30% of your available credit, then it does negatively impact your credit report.
3. The deferred interest trap—deferred interest on big purchases is not the same as 0% interest. Deferred interest means that if a large purchase is not paid in full by the time the promotional interest free period ends, then all of the back interest becomes due immediately.
4. Pressure to spend—if you already have a problem with spending at your favorite store, then a store branded credit card is likely to make overspending more tempting.
5. Too many store cards can impact your credit—every time a store pulls your credit report to open an account for you, it is considered a “hard” inquiry on your credit report. More than 2 or 3 of these will begin to negatively impact your credit score.

So, as with most things in life, there is no one answer.  If you are well organized, can pay your outstanding balance every month on time, and be judicious on how many store credit cards that you carry, they can be good tools.  On the other hand, if you struggle to stay within your budget, have a hard time paying off debt, or plan to carry a balance, then a store credit card is absolutely not for you.

If you happen to open a card (like a Cabela’s Club card accidentally) that you realize you should not carry for the long term, then you should cancel the card as soon as you have paid the balance in full.  Simply call the credit card issuer and request that the card be closed at the consumer’s request.  With the notation that you were the one that closed the account, this should not negatively impact your credit score.

And, while I do plan on doing just that with my Cabela’s card, the enjoyment of a beautiful day and new fishing lures was worth the adventure:

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