Category: Credit Card

Retail Store Credit Cards and How They Impact Your Credit

retail credit cards and credit

We have all been there: you get up to the register at a store in your local mall, purchase in hand, and the associate begins ringing things up, but then they pause.

“Do you want to put this on your XYZ Store card?”

You automatically tell them you don’t have an XYZ card, even though you know what’s coming next:

“Would you like to apply? Approval takes 20 seconds, and you can get 20 percent off of today’s purchase.”

Now you’re presented with a choice. At first glance, it seems a pretty simple one to make. After all, you are buying something anyway, and now you can get it for less. But, slow down a moment and consider what you are actually doing.

You are applying for a brand new credit card and have not even had a chance to consider what impact it will have on your credit score, whether or not it has a competitive interest rate, or if there are any sort of hidden fees… In short, you are being asked to buy more money on impulse.

Let us take some time now to consider all the angles of retail store credit cards so you can make a wise, educated decision the next time this situation presents itself.

What are retail store credit cards, and how are they different from “normal” credit cards?

Retail store credit cards are the cards nearly every retail store makes available to customers. They function like any other credit card, but can only be used for purchases at that store or (in some cases) on the store’s website. As such, retail store credit cards are no different from any other type of credit card in how they are used or what impact they can have on your credit score.

Every application and “20-second approval” requires a hard inquiry that will drop your credit score a little bit. If you apply for several store credit cards over a short period of time, the overall impact could be significant.

It also means that every retail store credit account in your name increases your total available credit, and every balance you maintain on those cards counts toward your total debt. So, when the bureaus are figuring your credit score (or lenders are considering your loan application) retail credit cards count into the important credit utilization ratio.

Likewise, your payment history and timeliness on every retail store credit account — even that little $300 limit card for the hole-in-the-wall shoe shop in the mall — counts either positively or negatively toward your credit score and history.

Why do retail store credit cards exist?

You may wonder, since I can use my “normal” Visa or MasterCard at all of these stores, why do retail store credit cards even exist?

The answer is simple: retail store credit cards encourage you to shop more often and/or spend more at the issuing store. At the same time, they offer the store contact and demographic information about you and your buying habits they might otherwise not be able to collect, which aids them in their marketing efforts.

That is not to say these cards cannot benefit the consumer in some way as well, but it is important to understand that benefits relating to the customer are not the main reason behind a store’s provision of a store-specific credit card.

What are the advantages of obtaining a retail store credit card?

As with any financial decision, there are pros and cons to consider regarding opening a retail store credit account. Here are some advantages these cards can offer:

  • Sign-up discounts – Nearly every retail store credit card includes some sort of instant discount or bonus for signing up, often applicable to the purchase you’re making right now. Everything else being equal, this is essentially free money, so it can be a positive thing.
  • Ongoing discounts – Many store cards also offer additional discounts related to using the card. These may be related to individual products, seasonal specials, or may be a flat discount off every purchase made using the card.
  • Special offers or perks – Some retail store credit cards offer additional perks as well, such as exclusive offers reserved just for cardmembers, or accumulation of reward points for use toward future purchases. In rare cases, these perks may even be made available toward purchases or rewards outside the store itself.
  • Spending flexibility – Having a credit card available for use at a given store can allow greater flexibility to make purchases when the price is best or when you most need the item, rather than waiting until you have the cash handy.
  • Interest-free financing – In many cases, store credit cards will offer interest-free (0%) financing for a limited time and/or toward purchases over a certain dollar amount.
  • Establishes a credit history – Retail store credit cards are much easier to qualify for if you have little or no credit history, or if you’re working on fixing your credit after a bankruptcy or similar situation. Credit consultant Julie Marie McDonough, author of “How to Make Your Credit Score Soar,” calls retail cards the “training wheels” of credit.
  • Builds a credit history – Used wisely over time, store credit cards can boost your credit score and build a positive credit history just like any other credit card or loan. However, since they are easier to qualify for, they may be the best or only choice for some consumers in need of credit repair.

What are the disadvantages of opening a store credit card account?

At the same time, there are also disadvantages to be considered as well when it comes to obtaining a retail store credit card:

  • Low credit limit – In many cases, retail store credit cards will be approved with very low credit limits, sometimes as little as $200 or $300. Factoring in that initial purchase you’re making, such a small limit could result in negatively impacting your utilization ratio (which should be kept under 30 percent at all times.)
  • High interest rates – The average APR on the credit cards from America’s largest retailers was 99 percent in 2017, which is significantly higher than the national average for credit cards during the same period (around 16.7 percent). As noted by Consumer Reports, if you fail to pay your monthly balance in full, “the interest you’ll be charged could wipe out the discount you got for signing up for the card.”
  • Expensive fees – The more accounts you maintain, the easier it is to miss a due date, even if the money is there. While they are common with most credit accounts, late fees on store cards are particularly steep. Target, for example, charges a $27 late payment fee the first time you pay late, and then increases the late fee to $38 for each month you miss payments up to six months. This is a direct result of the lender’s easier and faster approval process. They are taking on extra risk by approving less reliable debtors, so they make up for that risk with higher late payment fees.
  • Non-transparent rules – The standard sales pitch described at the outset lends itself to pressuring the consumer into applying without providing much, if any, of the fine print. Unfortunately, some retail store credit accounts include rules and limitations in the fine print that would have likely resulted in a different decision if the consumer had known.

Next time the associate asks you to apply for a store credit card, should you do it?

Of course, the answer is, “it depends.” The two most important factors in the decision are your own spending habits and the specific details of the account you’re considering.

If you are already a regular customer at the store and make purchases there regularly, then there’s a good chance the discounts and perks that come with a store credit card could save you money over time. Likewise, if you haven’t applied for credit recently, and have no intention of doing so again in the near future, the tiny impact on your score from applying for one account shouldn’t dissuade you.

On the other hand, if having that card in your pocket is likely to cause you to overspend or buy things you otherwise would not have considered, just say “no!” If you’re planning to apply for an important loan or to request a credit limit increase on an existing card, there is no sense in jeopardizing that approval for the sake of a 10 percent discount on your current purchase.

As with any sort of credit, it’s vital to remember that credit cards can and should be a powerful tool to help improve your financial situation. But, that’s not why they’re offered to you. It’s up to every consumer to make the best decision about whether or not to apply for and use a given credit card to their own benefit.

For more advice, check out these past articles on wise use of credit and how to boost your credit score.

 

 

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How to Overcome Credit Card Anxiety

credit card anxiety

Guest post by Alayna Pehrson – Content Management Specialist at BestCompany.com

You can use credit cards as tools to build your credit, right? Unfortunately, many people fail to see credit cards in that way. Credit cards can have a poor reputation that some people simply can’t overlook. Although credit cards will only cause damage when used irresponsibly, many people still get anxious when they think of using a credit card. Here are a few tips to help you overcome your credit card anxiety:

Do Your Research

One of the best things you can do to lessen your credit card anxiety is independent research. Reading blogs, books, and seeking out other resources can help you understand how to use credit cards wisely. Countless, easy-to-access articles and websites focus specifically on credit cards and how you should use them to your advantage. It’s important to keep your personal spending and financial habits in mind as you do your research. For example, if you know that you often spend over your budget and you are prone to making irrational purchases, then research credit card articles and blogs that relate to your situation. Millions of people use credit cards daily, so there is bound to be at least one person out there who has faced similar situations and who can provide helpful advice about credit cards.

Learn From Others

Another thing you should do is learn from others’ mistakes. Almost everyone has made a credit card mistake at least once since they started using a credit card. If you observe their credit card usage as well as their mistakes, you will be able to understand the best and worst ways to use a credit card. You can learn from parents, relatives, friends, bloggers, etc. Learning from other people’s credit card mistakes can help you avoid making those mistakes in the future. After all, why should you suffer the same fate when you know how to avoid it? Observing both those who have good credit and those who have poor credit will teach you to recognize the difference between good and bad credit habits.

Check Your Credit Report

Not only can you learn from others, but you can also learn from yourself. Regularly checking your credit report can show you what areas you need to improve on when it comes to your credit. Staying in tune with your credit report is also one of the best habits you can develop. Those who check their credit reports on a regular basis are also more likely to catch identity theft before any real damage happens. For example, people who regularly check their report will have a better chance at noticing when any type of fraudulent activity (like unwarranted purchases and accumulated debt) is present. Overall, your credit report can show you how well you are handling credit.

Conduct a Self-Audit

In addition to regularly checking your credit report, conducting a financial self-audit could also help you with your credit card anxiety. Sitting down once a month and going over your credit history, your credit habits, and your debts can confirm that you are in control of your finances or highlight areas for improvement. You may think that a credit card will overrun your life and automatically condemn you to a lifetime of debt, but hopefully, your self-audit will show you otherwise. This self-audit should also be a learning process. You may not have great results after one audit, but that can be seen as an opportunity for personal financial growth. Again, you need to be willing to learn from both your mistakes and successes.

Have Confidence

Handling credit cards and finances with confidence can be a challenge. After all, if it were easy, everyone would have good credit and zero debt. Fortunately, there are ways to become confident with your credit card usage. If you develop and maintain good credit habits, do your research, and learn from both yourself and others, you will see your anxiety and fears disappear over time. You should remember that you are in charge of your financial future. Obviously, life can be difficult and throw challenges your way, but in the end, you are the one who uses the credit card; it doesn’t use you. Although having bad credit can be scary, you should keep in mind that it can be fixed. Fixing your bad credit does take time and money, but will definitely prove worthwhile.

If you’re concerned about your credit, learn about your options. Contact us today to learn more.

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Should I Put Medical Bills on a Credit Card?

medical bills

Medical bills are a big-ticket expense for many Americans. Even those covered by health insurance stand to pay huge amounts out-of-pocket in the event of a medical emergency or ongoing treatment. In fact, one study found that 1.7 million Americans live in households that declared bankruptcy due to medical costs.

It might seem silly, or outright unfair, that something as fundamental as medical expenses might result in destitution, but that’s the world we live in today, and many Americans struggle to cope. When faced with a hefty medical bill, sometimes you’re left without options — maybe the less-than-ideal, high interest credit card in your wallet is your only respite. But does it make sense to pay for medical bills with a credit card?

Medical bill payment options

In the wake of a costly medical procedure, you should always look to pay the bill outright. Paying with cash, check or debit card will satisfy the bill from the outset, and therefore costs will not plague you down the line. But, of course, this isn’t always realistic. Very few of us have tens, or even sometimes hundreds, of thousands of dollars in savings to cover medical costs.

The next best option is a payment plan. In many cases, you can set up a payment plan with the billing department, and as long as you stick to it and make minimum payments, your bill won’t go to collections. This is a very popular payment method for those with the overall means to pay medical bills but without the upfront capital to cover it in the moment.

Paying for medical bills with a credit card should be a final resort. This method of payment will incur interest payments and make your payment that much more costly. A large enough medical bill can loom over your finances, and potentially ding your credit, for years to come. This is a tough position to be in because not only will it drain your bank account, but also necessitate credit restoration down the road.

There are credit cards specially designed for medical costs, but these are also a slippery slope. Medical credit cards usually offer a 1 – 2 year long promotional, low financing period, but if the balance extends past that window, you’re likely to take on huge interest payments.

The primary advantage to charging a medical bill to a credit card is obvious: you’re able to pay your bill. While your logical brain recognizes that this might not be the most sound financial decision, when faced with a health crisis you might not have a choice. The alternative — not paying your bill at all — could be much worse for you financial future.

What happens if medical bills go unpaid

Recently, the major credit bureaus instituted a change in the way that medical bills are reported. A 180-day waiting period is now required before reporting a medical debt to the bureaus. If medical bills go unpaid for a prolonged period of time they will be handed over to collections. However, FICO’s newest scoring model, FICO Score 9, ignores paid collection accounts. That means that if you pay your medical collection, it won’t negatively impact your score.

If you have any account in collections — medical or not — you will likely see a negative effect on your credit. The degree of damage is usually correlated with how high your score is, how long the account has gone unpaid, and how much you owe. If the debt is not handled after that, you run the risk of repossession of property, wage garnishment, and other dire financial consequences. This is where credit repair can help.

Don’t let large medical bills, or any other kind of debt, weigh down your financial goals. As a distinguished leader in the credit repair industry, Lexington Law has helped consumers improve their understanding of credit more than 20 years. Contact Lexington Law today if poor credit is inhibiting your ability to pay off debt.

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The Future of Credit Cards

future of credit cards

Guest Article from Alayna Pehrson – Content Management Specialist at BestCompany.com

Credit cards can play a major part in determining the status of your credit reports and credit score—the key stepping stones to obtaining the best financial opportunities society has to offer. As technology evolves, credit cards are evolving too, and to maximize their benefits, you’ll want to stay on top of the changes.

Increasing payment variety

Physical credit cards, although helpful when trying to build credit, are starting to lose the popularity game to different payment methods like Apple Pay, PayPal, Venmo, and virtual credit cards. These payment methods are constantly advancing and are expected to gain even more popularity in the future. Although a potential decrease in credit card usage may seem surprising, the world has already seen a different form of payment lose its frequency: cash. Due to the development of credit cards, debit cards, and digital payments, cash transactions became less popular. So, what does this mean for physical credit cards? Growing payment variety may cause credit card usage to drop until physical credit cards will no longer be a reality. On the other hand, credit cards have adapted in the past, which has led consumers to use them regardless of technological advancements. Although credit cards may be fighting a losing battle in comparison to newer forms of payment, credit cards are still valuable as they are directly correlated with credit reports and credit scores. A person’s credit score cannot be influenced (yet) by online/mobile/app payments. In order to continue getting certain rewards, opportunities, loans, etc., the public has to continue using credit cards on a regular basis. Until another form of payment evolves to influence credit, credit cards will still play an important part in society’s future.

Security risks and advancements

Although credit card security has improved over the past couple of years with the implementation of around-the-clock credit monitoring and fraud alerts as well as identity protection services, credit card identity theft is still a constant threat. Physical credit cards are at-risk more so than virtual credit cards and mobile payments because credit cards and credit card numbers can be physically stolen. People who regularly use credit cards usually carry them in a purse or wallet and use them to make in-store purchases. If they are not careful, thieves can easily steal the card or write down the number when the card owner is using the card to make an in-store purchase. Criminals can also steal a credit card number if the card owner swipes the card at an unsecured location or if the card owner makes a purchase online on an unsecured website. Credit card thieves can use credit card skimmers to steal credit card information. Thieves can also use malware to obtain credit card information off of a personal device or computer. While the future of credit card security looks bright as new technology and security measures are being developed, other forms of payment may continue to prove more secure regardless of future credit card security.

Current credit card usage

Credit cards are designed to be influential forms of payment. For instance, having a good credit score along with clean credit reports can help you buy a car, purchase a home, get better interest rates, earn rewards, get approved for loans, or land a dream job. Bad credit, although devastating, can be fixed via credit repair and the sensible use of a credit card. The world will continue to use credit cards for those very reasons until there is a significant change that forces credit cards out of the picture. Because credit cards have been used for years on end and have evolved throughout time, there is not yet substantial evidence that proves credit cards will be obsolete in the near future.

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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5 Reasons to Say “No!” to Opening a Store Credit Card This Year

store credit card

The holidays are a distant memory and now that the bills have mounted, we find ourselves in need of a few things for that we’ve been neglecting. Maybe you can relate. Perhaps the new year brought with it a new job or some necessary home repairs, and you find yourself in need of a wardrobe makeover or some supplies from your neighborhood home-improvement store. Thanks to the holidays, you may be tapped out and tempted to open a department store or Home Depot card to make these necessary purchases.

To make this an even more tempting option, the cashier says, “Would you like to open up a store credit card today? You’ll get 15 percent off this purchase and a 10 percent discount every time you use it!” With a big smile and fingers hovering over the keyboard she says, “It’ll only take two minutes to get you approved and you can be on your way.”

What do you do?

Based on the figures, many people in this situation will say “yes.” The Nilson Report (an annually published report on the world’s top card issuers) confirms that private store credit cards made up over 7 percent of the total annual credit card debt carried in the United States. While 7 percent may sound insignificant, it accounted for over $184 billion in 2014 and was the third consecutive rise in store credit card debt in as many years.

A survey conducted by a popular credit card ranking service found that 9 of the top 20 most-used credit cards in the nation are store credit cards from retailers such as Sears, Macy’s, JCPenney, Kohl’s, and Walmart.

Is there really anything wrong with taking advantage of store credit cards, especially considering the discounts and perks they generally offer to sign up? Despite the appeal of these offers, there are at least five good reasons to steer clear of opening additional store credit card accounts this year:

Those discounts are only half the story

It is important to remember that retail stores are not in business to lose money. If they offer you a discount, it’s because they ran the numbers and know they can afford to do so, meaning you very well may be paying too much for your purchases to begin with.

To test this theory, before you get to the checkout line, take a few minutes to search online for the products you’re considering buying and see if they’re available elsewhere for less. In many cases, you can get the same exact item for a lower price, even factoring in shipping.

But, surely if they’re giving you 15 percent just for signing up, it’s worth it, right?

The discounts and perks are covered by the interest rate

Beyond the simple math, retail stores have also done their research and understand human nature and spending habits.

They know most Americans go overboard during the holidays, leaving them strapped in the early months of the new year and continuing to spend beyond their means. They also know it is highly unlikely that most of their customers will be able to pay off the balances they accrue within the first few months. Because of this, many of these store credit cards come with enticing introductory offers, including “zero interest for 3 months” or “no payments until…”

If you read the fine print, though, you’ll see that these too-good-to-be-true offers carry a dangerous caveat: If you don’t pay off the entire balance during the introductory period specified, ALL the interest you would have accrued on your full balance is instantly added to your debt.

Which brings us to a third serious consideration:

The interest rates are usually higher

In 2017, the average annual percentage rate (APR) for all credit cards issued in the United States hit an all-time high of 16.15 percent. In comparison, however, the average store credit card APR is 24.99 percent!

Based on a 24.99 percent APR, you would pay $125 for every $100 you spend on that card over the period of a year, causing the initial discount and other perks to lose their luster. It only takes a few months of minimum or no payments before your initial discount is completely erased and your higher-than-average interest continues to pile up.

That low credit limit hurts your credit score

Another danger that comes with store credit cards is the negative impact they can have on your credit score.

These instant-approval cards often only offer a few hundred dollars in available credit to begin with. Because of the low credit limit, your very first purchase is likely to use a significant portion of your available credit on that account.

Your credit utilization ratio is one of the factors used in determining your credit score, and the higher that ratio is, the more it tends to negatively impact your score. To avoid negative effects, you should be striving for a credit utilization ratio under 30 percent. However, if your Big Box Store Credit Card only has a $300 credit limit, that first purchase of $185 immediately puts you at a ratio of 62 percent.

By itself, one low-limit card with a high utilization ratio probably isn’t going to sink your credit. But, if you’ve been lured into signing up for this one, how many others do you already have in your wallet? It is important to know how much of your overall credit is made up of low limits, elevated interest rates, and high utilization ratios.

Store credit cards are designed to encourage overspending

Finally, let’s call these store credit cards out for what they really are: clever means used by retail stores to encourage their customers to overspend.

Even looking beyond the introductory promotions, the low credit limits and high interest rates, consider this: why are we hit with the credit card offer at the worst possible time for us to make a rational decision — either during or immediately after the holidays? During these times we may be mentally struggling with pulling out the cash or debit card to handle our purchase and that’s when we’re offered a shiny new piece of plastic that can make this entire situation faster, easier, and 100 percent pain free.

There’s a lot of psychology involved in how that’s set up. And, not surprisingly, if you’ve ever worked the cash register at one of these retailers, you know how hard they push the credit card offers. In many cases, employees can lose their jobs if they don’t rack up a high enough number of new accounts per week or month. That kind of pressure isn’t focused on your best interests or your long term financial health.

Credit should be a tool for strategic spending that’s part of a planned budget. Or, if absolutely necessary and with clear limitations, as a safety net when an emergency arises. Credit cards should be chosen wisely and should never be a vehicle for impulse purchases or a thoughtless add-on obtained for convenience.

As you’re weighing the need for the card, be aware of the potential harm store credit cards can do, and remember these five reasons why you should say, “no!”

The best way to understand how different types of accounts impact your credit score is to regularly review your credit report. If you’d like a free credit report summary and credit consultation, contact a credit repair company today.

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