In honor of Black Friday and the bargains offered by retailers, I thought it would be a good time to address the sweetening of deals through retail charge cards. The extra 10% off, coupled with a rewards program or even the ability to work up to an elite status can be tempting. In addition to these benefits, I enjoy getting cardholder e-mails inviting me to special discounts and cardholder shopping events or free shipping for online purchases.

So what’s the down side?

I have identified 4 downfalls of holding too many retail charge cards. Most people don’t realize that the moment they answer “Yes” when the cashier asks if you would like to open a store card, you are applying for credit. The cashier proceeds to ask for your drivers license and any major credit card.

This leads to our first downfall (1) an Inquiry on your credit report.
Inquiries for the purposes of extending credit remain on your report for at least 24 months and if credit is extended, then it will be there for much longer.

Once this inquiry goes through and you are approved for credit, the store’s credit department gets to choose how much to extend. Although you have thousands of dollars of available credit on other cards, the store most likely will stick to a couple hundred dollars. Which is our second downfall (2) a Low Limit. This low limit negatively impacts future inquiries on your credit, which can affect important loans like car or home loans.

This low limit is coupled with our third downfall (3) a High Interest Rate. Department and retail store charge cards have some of the worst interest rates out there, even for customers with Good or Excellent credit. I have heard of outrageous limits ranging from 21% to 33%. Although I have not seen an interest rate reflected on my credit report as well I have heard there is a negative impact because the creditor assessed it’s risk and gave you a high interest rate.

All of this damaged happened while you were standing at the register, waiting to check out. The last downfall can be avoided by your actions. It is the value of the items you wish to purchase on store credit as a percentage of the credit extended to you otherwise known as your (4) Utilization Percentage. The higher your utilization percentage on any particular card, the greater the negative impact on your credit score. If you are able to use less than 20% of your available credit, then this adverse affect can be avoided. The catch is, you probably wouldn’t have considered opening a store card in the first place if you weren’t spending a sizeable amount to begin with.

Should you still open a card?

Of course you can still open store charge cards. Especially at your favorite retailers that offer excellent reward programs. Just do yourself a favor and watch the interest rates and credit limits. A good rule of thumb is to not open more than 1 new card a year. Personally, I would try not to have more than 2 cards in my wallet with low credit limits. Once retailers increase the limit on at least one card to over a thousand dollars at minimum, I would be open to getting another card. Also, considering the high interest rate on these cards, I would only charge up what I can pay in full at the end of the month. If I wanted to carry a balance, I would stick to a lower rate Visa or Mastercard.

The good thing about store cards is that they are much easier to get than a major credit card. This benefit is great for students who are just building credit or people who have poor credit and are trying to rebuild.

I hope everyone is a now a wiser holiday shopper!

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  3. Debit Card Spending is Up, Way Up