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Financial Feud: Store credit vs. Credit score

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In Dispute:

$12

The Argument:

Hamad

My wife recently accepted a credit offer at a department store, even though I’ve repeatedly asked her not to. The deal saved her about $12 on a $300 purchase. She says she intended to pay off the card in cash and close the account right away, but the payment never went through, and she ended up owing $200. I say no matter how much these cards save her, they aren’t worth it, because they are a burden to manage and they can negatively impact her credit score. AM I RIGHT?

Expert Opinion:

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Hamad

The Argument:

My wife is a full time graduate student and constantly hunts for deals and bargains to save us money.

I really like the way she shops -- she brings home piles of discounted merchandise from places like GAP, Children’s Place, and H &M. And parents in our kids’ Sunday school think I have a high paying job, based on what my children wear.

But I’ve repeatedly ask my wife not to accept any credit offers at the register, no matter what the offer is. Not only does accepting these offers put an extra burden on me, because I have to track another bill, but it also makes dings on her credit report -- one ding for the “inquiry” and another for the “new account opened”. All that for a few dollars of savings.

One day, however, she decided not to follow my advice. A department store offered her a 20 percent discount if she applied for their store card. She asked them one question: Do you accept store card payments in this location? The answer was yes, so she opened an account and walked out, intending to make a cash payment for the purchase and close the account on her next visit -- which she did.

A few months later, the account showed up on her credit report as “closed by creditor for non-payment”. She never received a statement, because she closed in less than a month, and she lost the card payment receipt (it was probably applied to another account -- cashier mistake). She ended up owing over $200. She also hurt her credit score and got into a big argument with me.

In conclusion, I think saving is good, but sometimes things go wrong, so I stand by my principle of never applying for credit in response to a cashier request.

Dear Hamad -- You are right to avoid opening up credit cards at department stores in order to save on one-time discounts. While the savings may be enticing, the stores have ulterior motives. They make it all too easy for customers to continue using their cards after those initial purchases.

 

That said, I'd forget about the mistake that was made, those mistakes can be fixed.  Ultimately, it's how these cards affect your potential overall debt and credit score that you should be more concerned about.

 

Here are some problems that I see.  Major department stores carry much higher interest rates (around 23.83 percent) than the national average for regular credit cards (14.78 percent). Also, you never want to open a store card with the intention of closing it right away. This ultimately hurts your credit and lowers your total FICO score.

 

Trust me; I have been at the cash register many times with my wife when they have tried to entice us with a 10 or 15 percent discount on a large purchase. The process sounds too easy, and it is -- all they ask is that you give them your social security number and show them your driver’s license to open up a card (no application required). But if you are disciplined and knowledgeable about the credit game, you can easily tell the store clerk – NO, THANK YOU!

About the author

Louis Barajas is a small business and personal finance expert and author of five books on the subject.
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