Beginning on Black Friday millions of people will lose their minds temporarily and exhibit shopping patterns that could only be categorized as “overly aggressive.” Their shopping and spending from Black Friday through the remainder of 2010 will be at a disproportionate rate compared to the rest of the year. This means “20% off” offers from the retailers will be much more enticing. Think about it…20% off a $500 gift shopping spree is a meaningful $100 savings. This is compared to a more typical 10% savings on a much lower amount any other time during the year.
The problem is retail cards have a significant downside, in addition to the fact that they can only be used at one retail chain. The other problems are:
1. Retail cards are subprime cards with a store logo. If I asked you to close your eyes and I described a credit card that had a $750 credit limit and a 24.9% interest rate you’d likely tell me that it was a subprime credit card reserved for people with poor credit. However, it’s also a very typical set of terms for any newly opened retail store card, regardless of your credit standing. This means even modest purchases can hurt your credit scores because of the dreaded utilization rate. It also means rolling a balance from one month to the next which will chew away at any of the initial savings.
2. The inquiry caused by the application is the most damaging type. Retail card inquiries do not enjoy the same FICO treatment as auto, mortgage and student loan inquiries. And if they lower your score, they will likely do so for the next 12 months. The more cards you apply for, the more damage you can do.
3. The new accounts are also a problem. The average age across all of your accounts is a meaningful metric in your credit score. Adding new accounts to your credit reports will lessen the average age, which could result in a lower score. And, again, the more cards you open the more damage you can do.
If you do plan on using credit cards for your holiday purchases it’s best to use an existing credit card, and one with a decent credit limit. This eliminates any of the issues with opening new accounts. It also helps to protect your credit scores from unintended spikes in the utilization percentage. And, unless you really are a subprime consumer, your interest rates will likely be much more attractive than the mid 20s offered by the retailers.
Image by the idealist, via Flickr.com