We've all been through this before. After exiting the dressing room, you approach the cash register with a few items in hand. You're already thinking about ripping off the tags and wearing your new clothes to dinner that evening. (Is that just me?) As you fumble for your credit card, the sales associate says, "You know, if you open up a store card, you can save an extra 15% today." What do you do? This sounds like an enticing offer! And you'll get instant gratification with a discount today. But before you reach for that shiny new retail card, there are a few factors to consider.
Should You Open That Retail Store Credit Card?
1. A new inquiry will ding your credit score...slightly.
Each time you apply for a new credit card, the issuer makes a "hard inquiry" into your credit history. This dings your score by a few points. However, opening up a new card isn't all negative.
- New credit inquiries only impact 10% of your FICO score, so this isn't a huge deal.
- Hard inquiries fall off your score after 12 months, so the immediate impact is temporary.
- If you pay your new card off each month, you'll create a favorable payment history. This is the most important contributor to your FICO score.
So even though a new inquiry may temporarily lower your score, the net long-term impact can be positive. Still, I'd advise against applying for too much credit in a short period of time. You should also consider your timeline for a new home, car, or other big purchase requiring a loan or lease. These will result in hard inquiries, so be careful about letting them happen all at once.
2. A new card will lower the average age of your accounts.
15% of your FICO score comes from the length of your credit history. A longer history is better since it gives lenders more insight and comfort into your borrowing and repaying habits. Every time you open a new card, it lowers the average age of your accounts. This is not a big deal if you have a long, favorable credit history. However, for younger people with a shorter average credit age, this is something to consider.
3. Retail cards carry higher interest rates.
If I could only offer one piece of credit card advice, it would be this: Set your credit card to auto-pay, and never carry a balance month to month. Every point, mile, and perk you earn from credit card spend is completely offset by interest you'll pay if you carry a balance! According to a recent study by CreditCards.com, the average credit card has an Annual Percentage Rate, or APR, of around 15%. More than half of all retail cards, however, carry an APR of over 25%! This represents the amount of annual interest you'll owe on any balance you carry. If you are diligent about paying off your credit cards each month, then this shouldn't matter to you. Unfortunately, the average person does carry a balance, so the APR is a major factor to consider.
4. You may actually get a better return on your dollar with another card.
Retail cards are enticing because of the points multiplier they offer on each dollar you spend. Many retailers will offer 2 points per dollar spent at their store. Once you accumulate points, you can redeem them for store credit. However, you can often earn the same return, or higher, with another card. Let's take the Citi Double Cash card, for instance. This is one of the no-fee credit cards I recommend to beginners. Citi Double Cash offers 2 points for every dollar you spend, period. And you can redeem those points for pure cash, which is obviously more versatile than store credit.
Another card I recommend to beginners is the Chase Freedom. The Freedom offers 1x points on all purchases, but 5x points on rotating categories each quarter. For those of you who like to shop at department stores, the Chase Freedom typically offers 5x points on them in the fourth quarter. Just in time for holiday shopping! If you make most of your department store purchases between September and December, reconsider that store card in exchange for the Chase Freedom!
Some retailers will offer better than 2x points. They may also offer other benefits such as exclusive discounts, preview parties, and early access to sales. In this case, it might make sense to open up a store card, especially if you are a loyal shopper.
The Bottom Line
It's the question you can expect each time you visit a retailer's cash register. "Would you like to open a new credit card with us today?" If you are a loyal shopper and the card comes with profitable perks and bonuses, applying for it can often make sense. However, ask yourself these questions before adding that new retail card to your wallet.
- Have I had any other "hard inquiries" lately? Do I expect more anytime soon? If the answer is yes, you may want to postpone your new card application.
- Am I ok with lowering my average age of accounts? If the answer is no, reconsider this new credit card!
- Do I expect to carry a balance month-to-month? If the answer is yes, a retail card is probably not the right option for you because you'll pay a higher APR.
- Can I earn a higher return with a more versatile card? If the answer is yes, then there is no reason to open up this retail card.
Do you keep any retail-branded cards in your wallet? I'd love to read your comments below!