Typically, when one approaches the register at a department or retail store, they will be given the opportunity to apply instantly for a store issued credit card. The pitch is that upon approval, the customer will receive 10% off of their current purchase using their new card. Everyone enjoys savings, so many people bite immediately at this offer. The problem is that this enticing, one-time savings, blocks the better judgement of the consumer. Few people ask for information regarding the introductory APR on the card. If they do, the salesperson rarely knows. Usually, APR’s on store issued credit cards starts at 21.99-23.99%. This APR is reserved for people with good credit. Introductory APR’s on store credit cards may start as high as 28.99%!
This is how the store benefits. They issue a card immediately without having to spend any money on advertising to gain an applicant. They immediately attain a balance on the card which has a high APR. They also get the consumer to return back to the store because they are carriers of their card. Plus, these cards may be used to make online purchases or catalog purchases over the phone. Their only loss is 10% of a purchase that they will more than double from each consumer over time.
Let’s say that you are a responsible individual. You want the 10% savings, so you figure that you’ll use the card, immediately pay the balance in full, and never use the card again. This seems like a legitimate thing to do, but it has a few flaws. You benefit from paying the balance off immediately because you’ve just saved 10%. True for the short term. Longterm, you may run into problems. It would be unwise to cancel this card directly after paying off the balance because it would show up as a closed account on your credit report.
Closed accounts on credit reports are viewed as negative by lenders. So now you’re stuck carrying a credit card that you won’t use because the APR is too high and it doesn’t come with any long-term rewards program. You will probably receive periodic credit limit increases over 9-month terms, especially if the lender sees that the account has a zero balance and no delinquent payment history. Each credit increase will directly affect your potential debt. Thus, potentially impeding your potential for credit card approval on cards that you will actually use. Is this worth the initial 10% that you saved?
If you want to save money on purchases, there are much better alternatives than store issued credit cards. One option is applying for a cashback credit card. These cards are issued by major issuing banks and typically come with low APR’s on purchases and balance transfers. Recently, Chase Manhattan Bank has replaced their Chase Cashbuilder card with the Chase Cash Plus Rewards Visa. This card has an intro 0% APR on transfers/purchases, no fee, and a 12.99% variable APR thereafter. You may earn up to 5% cashback on purchases or choose from a variety of different rewards, such as travel and merchandise. Savings using this card or other similar offers wisely, are much more lucrative than those of a one-time 10% savings on a purchase.
There are other specific rewards programs available. Chase also issues Disney, Starbucks, Borders Books & Music, and Avon Visas. Citi issues a Home Rebate Mastercard featuring mortgage savings and a Upromise Mastercard featuring future savings on college tution. All of these come with lower APR’s than store issued credit cards.
Another thing to be wary of are gas rewards cards issued directly from gasoline merchants. These credit cards typically come with high APR’s similar to those of department store and retail issued credit cards. If you are interested in saving money on gas, many banks now feature gas rewards cards. Chase currently offers Hess Visa and the Chase PerfectCard (which provides cashback on gas purchases), while Citi has just launched their Shell Mastercard. Applying for these cards from banks rather than merchants will provide you with greater savings and lower APR’s.
Be wary of signing-up for any merchant issued credit card. Read the find print and ask as many questions as possible before enlisting. These decisions may affect both you and your credit longer than you may think.
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