It will happen like this: You’ll be in line watching the cashier ring up your items and at the same time visualizing your holiday money disappearing, wistfully thinking, “It goes so fast.” Then, the cashier will ask if you’d like to save more money. Of course you would, right? All you have to do is sign up for the store’s credit card.
Sounds like an easy choice: get instantly approved for the card and save an additional sum of cash immediately. You’re a winner; but not really.
First of all, store-branded credit cards usually have interest rates as high as 25%, which could lead to spending even more than the original total without the card’s discount. Just think of that interest rate compounded over the many months or years it will take you to pay off the purchase.
There’s also the chance of getting your credit score dinged because of these impulse credit card decisions. Opening new accounts adds something called “recent credit inquiries” to your credit score file, and that can impact your overall score in a negative manner. These credit cards also have very low limits and a large purchase could place you in a higher credit utilization bracket. That’s a fancy term for saying you’re spending too close to the limit of the card, and the credit scoring agencies don’t like that, so it could damage your credit score, too.
Another danger of signing up for store credit cards is obvious, but not right away, especially while you’re standing in line listening to the cashier’s sales pitch about saving money. These cards promote more debt. Let’s say you sign up for a Home Depot (NYSE:HD) card or a Macy’s (NYSE:M) card and after the holidays are over you happen to be browsing at one of the stores and see something you like. You think to yourself, “I wish I could buy that.” And then you realize you can because you have their credit card. Bam! Instant stars in your eyes and a mind that’s not thinking clearly. It’s impulse buying all over again and that leads to further debt and growing monthly bills.
Before a cashier, who normally earns a commission for enticing you with these provocative deals, traps you, take a moment to think. If you need to sign up for store credit cards in order to purchase all the gifts you have on your holiday list then there’s something wrong with your list. You need to tweak it so you can comfortably afford to purchase the necessary presents. Don’t get caught up in the hype of “holiday giving.” It’s not worth going into debt for, and your family and friends should understand. If they don’t understand then you may want to reconsider even giving them a gift.
The holidays are about enjoying each other’s company; it’s not about running from store to store in a chaotic rush to find the perfect deals. Make a list, set a budget and stick to it. And when the pleasant cashier asks you if you’d like additional savings by signing up for their store credit card, simply say, “No thank you.”
Howard Dvorkin, CPA, is the founder of Consolidated Credit Counseling Services, Inc., and the author of Credit Hell: How To Dig Out of Debt. He is also personal finance expert and consumer advocate who has been helping people for more than 15 years.