In almost every store I visited while shopping over the last week, the cashiers offered me an additional discount if I’d apply for (and be granted) a store credit card. Usually a 10% discount for the entire day is part of that offer.
According to MSN Money, some companies have been offering more, such as repeated days with 10% off sales and accumulation of “points.”
You can’t make a generalization about what’s good for everyone, but it seems to me that these deals could end up costing many individuals more money than the amount they’d save through the related sales. Here’s how:
* Interest rates on store-branded credit cards are often significantly higher than what you can find elsewhere. For those of us who pay our card off each month, that’s not as much of a problem, but occasionally there are annual fees, as well.
* Opening up more credit accounts can hurt your credit score. In the course of a year, if you open five new store credit cards, each offering 10% off, and purchase $100 worth of items qualifying for a 10% off deal at each store, you’ve saved $50 that year. However, if you go to qualify for a mortgage, your credit score may have taken a big enough hit that you qualify only for a 6.0% rate instead of a 5.5% rate. If you take that higher rate on a 30-year mortgage of $200,000, you’ll end up paying almost $23,000 more over the course of that loan than if you had qualified for the lower rate.
That’s a steep price to pay for signing up for multiple credit cards to save a measly $50.
(All these numbers a purely theoretical. Perhaps signing up for a number of credit cards won’t lower your FICO score much; the secrets of the calculation are highly guarded. MyFICO.com does offer similar calculations, however.)
Update: Here’s a new article from David Bach: Four Reasons to Avoid Store Credit Cards. The four reasons are high interest rates (often exceeding 20%), a slow payoff of the balance, it could hurt your credit score, and the possibility of paying bills late. It sounds like David and I are on the same page.
Updated February 7, 2012 and originally published December 6, 2005.
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