What's In Store? Temptation

The lure of store cards comes with heavy, hidden costs

Your Money

August 01, 2004|By Lorene Yue

ItM-Fs a ticking debt bomb wrapped in a sweet sell M-y sign up for a store credit card today and save money on your purchase.

ItM-Fs an offer many consumers canM-Ft refuse: The average U.S. household has nearly seven retail-related credit cards.

M-tCredit cards arenM-Ft like greeting cards,M-v said Catherine Williams, who handles financial literacy for Money Management International, nonprofit credit counselors in Houston. M-tYou donM-Ft need one for every occasion. I wouldnM-Ft shy away from one, but I would shy away from six.M-v

While retailers are dangling that instant discount, you might not think about the hidden dangers of taking up the deal. For starters, itM-Fs a matter of simple arithmetic. If you tend to max out your credit cards and already have four of them, adding another could increase your debt load by 25 percent.

The average household had $9,205 in credit-card debt last year, according to CardWeb.com Inc., a Maryland online publisher of payment card information. Charges made to privatelabel credit cards, the ones affiliated with department stores and other retailers, rose 14 percent last year, according to Household Retail Services in Chicago, which runs private-label credit-card programs.

Besides getting you deeper into debt, taking up too many retail card offers can sink your credit score M-{ a rating between 300 and 850 points. If you score 700 or above, you could snag an interest rate of 6.04 percent or less on a 30-year fixed-rate mortgage of $150,000. At 699, your rate could be 6.58 percent. At 674 points, youM-Fre looking at a 7.73 percent interest rate.

Each new credit-card application could drop your score between 3 and 12 points, said Stephen Snyder, author of Do You Make These 38 Mistakes With Your Credit? ($29.95, Bellwether Inc.).

Waiting a few months between applications wonM-Ft help. An inquiry will count against you for a year and stay on your credit report for two years. The older the inquiry, the less impact it will have on your score, Snyder said.

There is no shortage of retailers who want to issue their own cards, even if it means handing the account management over to someone else.

M-tThere have been new players getting into this market,M-v said Dick Kleese, who oversees business development for Household Retail Services.

Department stores, once the stalwarts of private-label credit cards, have not been increasing in numbers, mainly because of a lack of new nameplates. Instead, specialty stores such as CompUSA, Best Buy and Circuit City are launching their own credit programs.

But know that these retail programs behave very differently than your typical Visa or MasterCard.

For starters, they tend to charge annual percentage rates of 20 percent or more M-y much higher than a traditional credit card. And since those private-label- card interest rates are tied to prime, any increase by the Federal Reserve will bump it up higher.

High penalties

M-tAnd heaven help you if you are late on one of those,M-v said Lynnette Khalfani, author of Investing Success: How to Conquer 30 Costly Mistakes & Multiply Your Wealth ($24.95, Advantage World Press). Miss a couple or more payments on a retail-related card and that interest rate will swell by 3 to 4 percentage points.

Hands down, the best advice is to just say no and walk away. But if you must give in to temptation, then wait until you have a hefty purchase.

Getting a new line of credit for a 10 percent discount on a $40 item is hardly worth the hassle. But that on-the-spot incentive could save you some bucks, if youM-Fre planning to drop a lot of dough.

Of course, youM-Fll have to exert some strict self-discipline right after the initial purchase.

DonM-Ft take that in-store credit offer unless you honestly can say that within 30 days youM-Fll pay the bill in full, Khalfani said.

Pay immediately

M-tDonM-Ft even wait until you get the bill, write a check immediately,M-v she said.

Also ask yourself if you plan to apply for a loan or to refinance your home in the next year.

If the answer is yes, then hold off opening any credit card so that you can get the highest credit score possible.

You donM-Ft want $20 in savings today to cost you thousands of dollars down the road thanks to a lower credit score.

Lorene Yue is a Your Money staff writer.

Full deck of cards

Average number of debit and credit cards per U.S.household:

6.7 - Retail credit cards

1.9 - Debit cards

4.8 -Bank credit cards

13.4 - Total cards

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