This is a guest post by Tim Chen who is founder and CEO of NerdWallet.com, a website that helps consumers to find rewards credit cards. Tim also educates consumers about credit cards and debt management at the Forbes Moneybuilder Blog, the Huffington Post, and the Christian Science Monitor.
Between overly aggressive sales clerks and cryptic PA announcements, shoppers could be led to believe that store credit cards are hotter than $499 HDTVs this holiday season.
Store cards have high interest rates, lousy credit card rewards, and none of the benefits of your average card, but all too often customers will look right past these issues and only see the initial discounts. So for those who can’t be talked out ofapplying for store credit cards this holiday season, know that using them wisely can still save you money and raise your credit score. Here’s what you need to know to get the most out of store cards, and avoid getting taken to the woodshed.
Do Your Research
Don’t give into pressure to apply for a card where you rarely shop. Just because it offers you 10% off your first purchase doesn’t mean its actually going to save you money in the long term. On the other hand, if you’ve been considering a card for one of your favorite stores, do a little research. Which cards offer the best rewards?
For instance, Kohl’s sends 15 to 30% off discount coupons 12 times a year, plus pick-a-day savings six times a year if you spend $600 within 12 months. Best Buy offers 0% interest offers for big-ticket items and, when you use your Best Buy rewards card with your Best Buy credit card, you’ll earn extra bonus points. These are two of the best offers for frequent customers.
If you make the decision to open a card for a store you know you’ll shop at frequently, pick your day appropriately. Don’t open your new JC Penney’s card on a transaction where you’ll only be spending a few bucks. Save your 10% bonus savings for a day when your total is high and you can maximize the rebate, but don’t go so high that you won’t be able to pay the bill at the end of the month because the interest charges will mitigate the benefit.
The Macy’s credit card offers two consecutive days of savings – so apply for the card on a day when you know you can shop both days, preferably the day before a new, big sale.
Pay at the Register
Worried about getting into trouble with your store credit card and its 22% or higher interest rate? Carry cash and make a payment – in the same amount as your purchase – immediately. The clerk may roll her eyes and the credit card issuer won’t be thrilled, but you won’t have to worry about remembering due dates, keeping track of grace periods or setting aside the cash for the bill.
Keep a Budget
Those zero percent interest credit card offers from stores like Home Depot are very appealing for big-ticket items. But if you don’t pay off the balance before the introductory rate expires, you’ll get jammed with even more interest than you though. The way these work is that you get charged interest retroactively for those months where you thought you were paying 0%, which won’t save you any money.
Set a budget for your purchase. If you just bought a home theatre system for $2400, including taxes, warranties and installation, with no interest for 12 months, make sure you can afford to pay $200 per month on the card. Also understand the difference between no interest/no payments and simply “no interest” offers. If you have “no payments,” keep that money in the bank, but make sure you set it aside where you won’t be tempted to touch it, since the payments will come due in the end.
Use Store Cards to Improve Your Credit Score
Your FICO credit score will take a few dings (3 to 5 points) whenever you apply for a new credit card, since recent credit checks count against you. And it’ll take another hit (up to 10 points) when you open a new account. But like any credit card, a store credit card can help your credit if you play it right:
– FICO counts retail and gas cards as “diverse” revolving credit, and a better mix of available credit aids in 10% of your credit score calculation.
– Since you won’t be keeping a balance on the card, you lower your credit utilization ratio, which makes up about 30% of your credit score.
– And paying your bills on time and in full also helps your payment history, or 35% of your score.
– The longer you keep the account open, the better it reflects on your credit score, since length of credit history makes up about 15% of your score.
Don’t give in to those impulses to get a store credit card just because you’ll save 10% on your $10 purchase in a store you visit once a year. Just tell the salesperson something like, “I just bought a house/car,” or – in the case of a really aggressive clerk – “I’m in bankruptcy.” That’ll shut them up pretty quick.