Q: "I’m heading out to the malls this weekend and I have just one question. Should I go for those “in-store” credit card offers? My sister nabbed one last week and she won’t stop talking about it. Should I take advantage?" – D.T. San Diego, Calif.
A: We salute your courage for hitting the stores this holiday weekend – just wear some body armor and have a good time.
As for the store credit cards, our advice is to avoid them. In general, you get better rate terms from the major credit card carriers and the extra cards you rack up at your mall can actually cripple your credit score.
But wait a minute; we’re getting ahead of your question.
Let’s start with your trip to the mall. Chances are, every time you approach the checkout counter you’ll be asked – maybe “hounded” is a better term – to open a store credit card. Most stores offer immediate discounts on your purchases and the better counter reps will put a dollar sign on that offer, telling you that with a new store card your $115 purchase becomes an $80 or $90 purchase.
That’s pretty tempting. After all, it’s a rough-and-tumble economy and saving 20% or so on your store purchase sounds like a good deal at first glance.
When your mind starts spinning that way, it’s time to step away from the checkout counter. Here are three good reasons why:
Retail credit cards are infamous for offering low credit limits and high interest rates. Store cards resemble sub-prime mortgages in that regard. You wouldn’t want a sub-prime piece of plastic, so why take a store card with similar features?
Your credit will suffer
The problem with store credit cards and low credit limits is a calculation that credit rating agencies call "credit utilization”. That means the amount of credit you’ve used up on your card and the amount of credit you have left. It’s easy to rack up a quick $600 on a $1,000 store credit card. But that represents a credit utilization rate of 60% - way higher than creditors like to see. If you use a major credit card, on the other hand, that has a $10,000 credit limit, $600 is going to leave you easily under the 30% credit utilization rate that most creditors consider safe.