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Read This Before Using a Retail Store Credit Cards

Been hit up lately by sales clerks promising big savings if you apply for a retail store credit card?

Just about every major clothing, electronics, and department store offers a similar promotion: In exchange for applying for a retail store credit card, you will get a discount, coupons, or special offers reserved for cardholders.

But if you apply for a store-specific card, you will most certainly not save money. And you just might hurt your credit score, too.

Never Apply for a Retail Store Credit Card!

Let’s take a look at a typical interaction at a department store. Imagine that you walk to the cashier with your loot in hand—in this case, let’s say you are buying a shirt and a pair of socks for a total of $62.

The cashier immediately makes you an offer.

“Do you want to apply for a retail store credit card? You’ll save 15 percent on today’s purchases.”

Heck yes! you think, gung-ho to save $9.30.

But the cashier isn’t telling you a few pertinent pieces of information. Let’s take a look at two of the critical facts you should know before applying for a store-specific credit card.

Never Apply for a Retail Store Credit Card, Reason #1: You will pay more than you save.

Many stores promote their retail store credit card by offering a one-time discount on same-day purchases. But you will most certainly end up paying more than you saved. The banks and the retail stores promoting these store-specific credit cards are counting on you spending more money so that they can recoup that discount, and then some.

Consider all the ways the banks and the retail stores can make money off you:

1.    If you are given a one-time offer to save on today’s purchase, you just might pile a few more items into your shopping card.

2.    In the future, you will be more likely to engage in a little “retail therapy” if you have store-specific credit cards in your wallet.

3.    You will be sent coupons and special offers that entice you to the store. Ever bought something just to take advantage of a coupon?

4.    And, of course, you will pay interest and fees on the credit card.

Suddenly, that $9.30 savings doesn’t seem worth it, does it?

Never Apply for a Retail Store Credit Card, Reason #2: Your credit score might suffer.

I can think of three reasons your credit score might suffer from a store-specific credit card:

1. Keeping these cards active can be tough.

2. You might end up with too many credit cards.

3. You will definitely add a credit inquiry to your credit report.

Let’s start with the first reason: Keeping these cards active.

An important part of learning how to fix credit is to have the right number of credit cards.  To earn the highest credit score, you should have between three and five revolving credit cards. And these credit cards should be active.

Credit-scoring bureaus want to know that you can responsibly manage your credit cards. If you let your credit cards go inactive, the bureaus have no idea whether you are able to manage balances and debt. In other words, inactive credit cards do nothing for your credit score.

But keeping a retail store credit card active can be tough. Are you going to buy a lawnmower from Sears each and every month? Are you sure you need a new Gap sweater twelve times a year?

Most likely, you will either keep the card active by making unnecessary purchases (which costs you money), or the card will go inactive. Either way, it’s bad news.

Let’s talk about the second reason a store-specific card might hurt your credit score.

Like I said, the credit-scoring bureaus are the happiest if you have the right number of credit cards (between three and five). If you do not have at least three credit cards, they don’t have the information they need to make a judgment about whether you are responsible. If you have more than five credit cards, they know that you are in danger of getting in over your head.

Three to five is the sweet spot. So if you are limited to just three to five credit cards, why waste one on a card that will only be accepted by one merchant? You cannot reserve a car using your Banana Republic card, but you can purchase a suit from Banana Republic using a Visa.

Too often, people apply for retail cards each time they are offered a discount. These people must also carry American Express, MasterCard, and Visas for everyday expenses, traveling, and business needs. And they quickly find themselves carrying a lot more than five cards.

Finally, let’s talk about the third reason a retail card could hurt your credit score: credit inquiries. Ten percent of your credit score is based on the number of credit inquiries you have on your credit report in the past year. If you apply for a retail store credit card, your score could drop a few points, and this could cost you a lot of money in interest on future loans and credit cards.

Of course, department stores and banks will never tell you to avoid retail store credit card offers–but we sure do!