One thing we always try and stress to our clients, especially when they first sign up for debt relief or credit repair services, is how important it is to have at least 3 open credit cards in good standing with the credit bureaus in order to maintain and build upon a good credit score. If you don’t have at least one open, revolving credit account, you need to get one ASAP so you can start building a positive credit history.
The problem now becomes a choice of which type of credit card is best for the client to build their credit back up as quickly as possible. More than a few immediately think to sign up for a retail credit card with their favorite shopping outlet.
And why not? Just about every one of these stores offers some kind of incentive to sign up for their credit card on the spot. I was at Barnes & Noble the other day, picking up a couple of books, and was offered 15% off my purchase today if I signed up for their credit card. A tempting offer to be sure, but I ultimately decided to pass, and the next time you’re presented with a similar offer, you might want to as well. Why?
• High interest, low limits. Most retail chains that offer their own credit cards try anything they can to get you to sign up on the spot, including offering to take as much as 20% off your in-store purchases then and there. But while the immediate savings may sweeten the deal (especially if you’re already seriously considering the offer because you shop there a lot), you might be regretting the decision in the long run.
Store credit cards generally start you off with a ridiculously low credit limit – usually no more than $500, meaning if you got a Best Buy credit card and plan on using it to pay off that new LED TV you’ve been eyeing all year (I’m right there with you), you’ll drive your credit utilization ratio into the stratosphere, which will drive your credit score into the ground.
They then follow that up with interest rates that can go as high as 30%, meaning if you make any big charges to your new account and don’t pay it off before the end of the “grace period” many retailers provide, you’ll be facing major interest charges, which can make saving a couple of bucks on your last DVD purchase seem a little less worth the effort.
• They’re really only good in that store. Yeah, you’re probably not going to be able to pay your cable bill with your Barnes & Noble store credit card, or book a cruise with your JC Penny card. Store credit cards are only really useful in the one store, and once you step outside they tend to lose their worth.
• They don’t even have as much influence on your score. While it’s true that having a positive payment history looks good on your credit report no matter what, store credit cards don’t have as much influence on your credit report as other credit cards. Combined with the high interest/low limits structure, and the fact that they’re essentially glorified gift cards, you can certainly find better options when you’re looking for a good credit card to fill out your history.
