The positive upshot of opening this account is made clear by the store employee: You can receive a discount on their purchase that day of as much as 30 percent, and perhaps even enjoy further perks over the life of the card. But what these workers won’t tell shoppers is that these cards can also be somewhat damaging to their finances if they’re not careful.
Recent data show that the number of retail credit card accounts held nationwide surged past 175 million in July, the highest level seen in 31 months, according to a report from the credit monitoring bureau Equifax. That number is up roughly 14 percent from the low experienced during the depths of the recession in 2010, and between January and May of this year, some 13.8 million new accounts were opened.
“The economic recovery is increasing both demand for new credit cards and the supply of credit,” said Equifax chief economist Amy Crews Cutts. “However, while consumers are seeking new credit card accounts, they are not increasing their use of that newly available credit as fast. Utilization rates of card limits continue to fall, and, additionally, we are seeing increasing payment ratios at the same time.”
However, consumers should be careful when opening and using these accounts. Just opening one can have a temporary negative effect on a person’s credit rating because it will increase the number of hard inquiries into their credit rating, as well as reduce the average length of time they’ve had all of their various accounts.
Further, because these credit cards are available to nearly all consumers regardless of their credit standing – qualifications on these cards are typically far less stringent than those for bank-issued accounts – they also typically come with far higher interest rates. That means any balance carried over from one month to the next may end up costing borrowers significantly more than if they had made the purchase on one of their other cards, even when the one-time discount is factored in.
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As such, consumers should think hard about the decision to take on such an account by considering the bigger picture and eventual cost to them.
Image: stevendepolo, via Flickr