Department Store Discounts Spell Trouble

buyer-beware-thumb47348061So there you are, waiting in line at the department store. You are on the ball this year, it is only November and you have got most of your Holiday shopping done. It is your turn to check out, you get the total and the clerk, with all the enthusiasm of a tobacco funded anti-smoking ad, asks:

“Would you like to save 20% on your total purchase today by opening a store credit card?”

What a deal! You have been trying to save money this year on your shopping and 20% off your purchase could really help out. After all, you are not going to use the credit card; you will probably just close it out as soon as you get it. But is this really a free discount, or is there more to this deal than meets the eye?

All too often, we sign up for these cards thinking that we are receiving a great discount, when in reality we may be paying a price much larger than anticipated. The impact of signing up for that department store credit card- or anytime we apply for debt-will fluctuate from person to person based on their situation and credit history. Anytime there is a hard pull on our credit, our score could be negatively impacted by 2-5 points, or 1% of your credit score. Much like the money you use to purchase your coffee every day, this can add up significantly over a years’ time, especially if you open and close store cards frequently. On top of this, store cards usually have high interest rates that make paying them off more difficult.

If you have long-term investment goals, particularly buying a house or refinancing, these department store cards might be killing your chances. When your mortgage lender pulls your credit and they see that in the last month you have: 3 credit card inquiries, 1 car loan inquiry, and now applying for a mortgage, they might think you are overextending your ability to handle debt. Even if these do not show up on your credit report, the new debt will be added to your debt-to-income ratio. This ratio can also prevent you from obtaining a mortgage, if your debt levels are too high.

Your credit score is your risk meter. So the more bills you add, the riskier you are. This is important to think about when you are going to open up yet another credit card to save some money or when that new car smell gets to be too tempting.

    Gershman Mortgage , Iowa