These days, it seems like everywhere I shop, I’m offered a credit card. I can’t even go to Target without being offered a store credit card so I can save 10% or whatever discounts are being offered on my purchases. While at one point in my life I actually thought store credit cards were worth it, over the course of my experience as a financial planner, I’ve learned that in the long run, they just add too much stress and complexity to my life. Here’s why.
First things first: Please remember that stores would not offer you something unless there was something in it for them. Even though store credit cards usually offer a discount of about 10% on all store purchases, they also usually carry a high interest rate of about 20%. If you make a purchase using the store credit card and then don’t pay off the balance in full at the end of the month, the store will make back the discount and then some. If you do have enough discipline to pay off the card in full at the end of the month, the savings can be worth it. But most people don’t, making this strategy a risky bet.
Another reason why store credit cards aren’t worth it is because when you use a credit card, it becomes easy to spend more than what your budget allows for just so you can get the sale or discount on your entire purchase. For example, let’s say you have a clothing budget of $100 per month, but you end up spending $130 on your store credit card just to get the store discount. Not only did you go over your clothing budget for the month, now you run the risk of not paying off the card in the full at the end of the month, which will cause you to accrue interest on the purchase.
Since store credit cards aren’t worth the all the extra hassle, if you need a credit card, try this method instead. Have one or two main credit cards, non-store-related, that offer a low interest rate and the best reward benefits for your life. For example, I like credit cards that offer me the most travel and mile points possible. You can use websites like www.bankrate.com to search for the best credit card for your life based on your requirements; i.e., no annual fee, low interest rate, best mile points, etc. Use these credit cards wisely, pay off your balance every month, and forget about signing up for any store credit cards. This approach is much simpler and the best way to avoid into the traps of the retail store credit cards.
Now, tell me what you think? Have you used retail credit cards effectively? Or have you fallen victim to the trap that present consumers? Leave a comment below so we can continue to learn from one another on our financial journeys.