The Store Card Revisited

Posted by Mike Smith :: August 27, 2007 @ 7:22 am

It seems as though the message about store cards hasn’t reached everyone yet, so it certainly warrants further discussion here on the Lending Club blog. I cringed when I heard someone in line ahead of me trying to “save 10%” recently while shopping at a department store.

While the trouble with store cards will be reviewed below, what made this case particularly frustrating was that the customer’s bill was only $30. I know that basic math skills aren’t as strong as they used to be, but I have to assume that nearly everyone can calculate that only $3 would be saved.

Here are the potential pitfalls of chasing that 10%:

High Interest Rate
Most store cards are run by third party banks and charge even higher interest rates than regular credit cards, averaging 20-25%. With such high rates, even small balances can quickly balloon. Any “savings” on the initial purchase will be eclipsed by the interest payments that will likely follow (unless the card holder pays in full right away).

Identity Theft Exposure
When prompted by the cashier, who was having trouble reading her application, the aforementioned customer disclosed her Social Security number in front of other customers. This is an open invitation to identity thieves. Your Social Security number should be treated as the most sensitive of personal data.

Another Bill Each Month
Having another card is also another deadline that you’ll be faced with each month. Remembering to pay the bill and the potential for fees and accumulating interest may be reason enough to avoid applying for a store card.

Credit Score Effects
Having an additional card also has the potential to lower your credit score. By having additional credit available through your store card, you may be seen as more risky to lenders for future credit. You may also increase your balance to credit available ratio, which could lower your score as well.

Conclusion
A final disadvantage was the anger clearly visible on the faces of other customers waiting for the application to take place. It wasn’t clear if they were angry at the customer for wasting their time in a futile attempt to save a few dollars or at the store for preying on the customer’s apparent financial ignorance. In any event, be sure to remember that saving 10% comes at a steep price.