How many times have you been offered the opportunity to apply for store credit cards or promotional credit offers? If you’re anything like me, you get offers almost every time you make a retail purchase. And they all promote great deals if you apply, such as 0% interest for six months! But wait – are these really such great savings?
Evaluating Promotional Credit Offers
The major question to ask yourself is whether you can repay the balance in full within the promotional period. If not, you’re probably going to be charged the accrued interest, which can eat up any savings you thought you were getting. In addition, the interest rate will likely increase after the promotional period, which can make paying off the debt even more troublesome. Before you apply, find out when the promotion expires and what the future interest rate could be. This can help you plan and determine whether you will be able to take advantage of the “deal.”
Another concern is that, while these offers can certainly be tempting, they have the potential to cause harm to your credit score. That’s because usually when you apply for credit, whether you’re approved or denied, an inquiry will appear on your credit report. An inquiry simply means that a company has reviewed your credit report because you’ve applied for credit. Too many of these inquires can negatively affect your credit score. So, if you’re thinking about applying for numerous credit cards in hopes of taking advantage of promotions, try to limit the number you apply for in order to preserve your credit score.
On the other hand, some store credit cards or promotional offers don’t require a credit check. This means the company isn’t checking to see if you are capable of repaying debt. If this happens, they may be giving you or other consumers more debt that you cannot handle.
Some offers associated with these cards are worth taking advantage of as long as you know the rules of the game. For example, some retail stores offer discounts, sometimes 10 or 20 percent, to customers who have store credit cards. This can bring you big savings.
If you didn’t have the retail credit card, you would not be able to take advantage of the rewards. If you use the store credit card unwisely, though, you may find yourself in deep debt. The savings might cause you to spend more than would with cash payments or your normal credit cards. The higher interest rates on the store cards will add up quickly and can lead you into real financial trouble.
A Smart Strategy for Retail Cards
The best and wisest strategy is to use the credit card for the deals and then pay the balance off immediately. If you do this, you are basically using the card like a coupon and the only detrimental effect is that an inquiry may appear on your credit report.
Some stores allow you to pay back your credit card balance right at this cash register. Take advantage of this option when available, so you won’t have to call the company’s customer service or payment department.
The Pitfalls of Store Credit Cards
Let’s take one more look at the dangers of using store credit cards or promotional credit offers:
- They tend to have high interest rates, generally above 20%.
- The cards may require a credit check, leading to an inquiry on your credit report.
- If the cards don’t require a credit check, they may be going to unreliable consumers and leading to uncontrollable debt.
- The cards promote “saving” but if used unwisely will lead to your purchases costing even more.
If you insist on signing up for one of these cards despite the pitfalls, you need to pay the balance in full every month before it starts accruing interest. If you’re able, use the cards like coupons and pay the balance in full immediately after making purchases. That way, you can actually take advantage of any discounts you initially receive.
For other questions about store credit cards or other debt and credit topics, contact us at 877-877-1995 or learn more about our free budget and credit counseling service.