Power of Advice
Department store credit cards are easy to get and often offer instant rewards. But for most consumers it’s just another piece of plastic they don’t really need.
If you’ve ever been to a department store you’ve heard the pitch: sign up for a credit card and they’ll give you a discount on your purchase. Typically the savings are in the range of 10% or 15%. The offer can be enticing, especially on big purchases, but these cards can also lead to huge bills down the road if used irresponsibly.
As part of the sales pitch store clerks will tell you sign up for the card to get the discount and then cancel it when you get home. It’s good advice, but few follow it.
What often ends up happening is that shoppers are enticed by the lure of points to use the card again, says Laurie Campbell, CEO of Credit Canada Debt Solutions. That’s not the only problem, she adds. Since store credit cards are often a secondary card in most people’s wallets, people forget to pay it off. “It’s so easy to forget, especially if your intention is to never use it again,” says Campbell. “But if you don’t pay off that card you’re no longer getting a deal.”
Forgetting to pay off a credit card is never a wise move, but it’s even riskier with a department store card because of the high interest rates they charge. Credit cards offered by The Bay and Sears, for instance, each have a 29.9% interest rate, while Home Depot charges 28.8% rate on outstanding balances. That’s about ten percentage points higher than most bank credit cards.
Consider this in dollar terms. If you a $1,000 balance on a credit card charging 18% interest it would take you ten years to pay it off making minimum payments. In the process you’d rack up just under $800 in interest charges. By comparison, it would take more than 21 years to pay off that same balance on department store card charging 29%, and in the process you would have to pay an astounding $3,000 in interest charges.
Having too many of these cards can also affect your credit rating. Every time you sign up for plastic a credit rating inquiry is registered. Too many inquiries in a short amount of time could send a signal to lenders that you have a credit problem. “It looks like you’re shopping for credit, which is dangerous,” says Campbell. “Potential creditors may think the person is in trouble and can’t manage their credit, which is why they’re trying to get more.”
Alison Griffiths, author of Count on Yourself: Take Charge of Your Money, encountered a different credit rating-related problem with a Home Depot card she signed up for when she was doing renovations. She paid it her card and forgot about it. But years later when she was looking at her credit report she found that the card’s limit was raised from $5,000 to $15,000 without her knowledge. “It was astonishing,” she says.
Griffiths quickly cancelled the card, but this serves as a warning for others. Lenders look at the total amount of credit a person has. Depending on your history, having too much available credit can be trouble. If someone has a card with a $15,000 limit and an interest rate of 30% a creditor—such as a mortgage lender—may be worried about the card getting maxed out. “It puts you into a higher risk category as a borrower,” she says.
Rather than using a store’s credit card, find a card that actually fits with how you shop. If you only do a small amount of your shopping at The Bay or Sears then it doesn’t make sense to own one of their cards. One of he worst things that can happen is if you keep going back to a store just for the points. “It’s not good if you’re suddenly going to Sears because you’ve got the card when you normally don’t shop there,” says Campbell.
As an alternative, if you’re looking to collect points or rewards on your card—and you never carry balance—then bank travel and cash back cards may appeal to you. While these cards also have high rates, most are lower than the department store cards and they give you points that you’ll actually use.
If the store discount that comes with a new credit card is just too appealing then make sure you pay off the card within the month then cut up the card and close the account, says Campbell. Just make sure there are no annual fees, no extra monthly fees and that it’s a one-time discount that kicks in immediately, she says.