Retail Store Credit Cards: How Many = Too Many?

“Would you like to save 10 percent on your purchase today by applying for a retail store credit card?”

Does that sound familiar? Just about every major clothing and electronics store has promotion aimed at getting people to sign up for a store-specific credit card. But what you don’t know about retail store credit cards could hurt your wallet and your credit score.

In 7 Steps to a 720 Credit Score, I talk about the importance of revolving credit cards in building your credit score. Indeed, a large portion of your credit score is determined by your credit card behavior. One of the best ways to earn a high credit score is to responsibly manage three to five revolving lines of credit, which include your major credit cards (Visa, MasterCard, and the like) as well as retail store credit cards, which are credit cards affiliated with a store like Gap or Chevron.

Before we talk specifically about how retail store credit cards can hurt your credit score, let’s take a look at the method credit-scoring bureaus use to gauge your creditworthiness. The credit-scoring bureaus want to see that you can responsibly handle a number of credit accounts at the same time. Having three to five credit cards allows them to tell whether you can make regular payments and determine whether you are a responsible person. If you do not have at least three cards, they do not have enough information about you to tell whether you are reliable or not. On the other hand, if you have fifteen credit cards, they know that you could quickly get in over your head by racking up huge credit card bills you are unable to pay.

In the words of Goldilocks, three to five is “just right.”

Of course, you must also show a record of timely payments. Doing so will cause your score to increase whereas failing to make payments on time will cause your score to drop.

You must also keep a card active. Inactive cards don’t tell the credit-scoring bureaus anything about your ability to manage debt.

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Though retail store credit cards will help you boost your score, they cause unnecessary problems:

  1. How will you keep your retail store credit cards active? If you do not need to buy a new washing machine each month, you might have a hard time keeping your Sears card active.
  2. If you are limited to no more than five revolving credit cards, why waste one on a card that will only be accepted by one merchant? You cannot book a plane ticket using your Old Navy credit card (but you can purchase an Old Navy shirt using a MasterCard).

Retail store credit cards have limited use. If you apply for too many of these cards on top of the Visa, American Express, MasterCard, and Discover cards that you use for traveling, meals, and other expenses, you will soon find yourself with more than five credit cards.

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And there is another downside to consider. Many stores promote their store-specific credit cards by offering a 10 or 15 percent discount on same-day purchases if you open an account.

Let’s do the math and see how this adds up. Imagine that you are buying a pair of $60 jeans from the Gap when the cashier tells you that you will get 10 percent off your entire purchase—$6—if you open a Gap credit card. You figure it is a wise move, so you sign up on the spot.

Consider all the downsides:

  • I should take advantage of this offer, you might think, piling a few more items in your shopping cart. Sure, you “saved” 10 percent, but you also just made a rash decision to splurge on things you probably do not need.
  • You have added a credit inquiry to your credit report. Credit inquiries count for 10 percent of your credit score, so your score drops a few points. This might not be a big deal, unless you plan to open another credit card, apply for a home loan, or get a car loan in the next few months. If you do, you might pay higher interest rates, which means that $6 “savings” just cost you a bundle.
  • If you do not pay this and subsequent bills immediately, you will have to pay interest
  • Ever heard of retail therapy? Having credit cards in your wallet strengthens your ability to make emotional buying decisions by creating opportunities for you to charge things you do not need.
  • Especially during the holidays, you will be more likely to make purchases you cannot afford.
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My point is that you most certainly do not save a single dollar by opening retail store credit cards.

Still not convinced? Think of it this way: Why would retail stores promote these cards with discounts unless they know they can eventually make money off the retail store credit cards?

A final note: Upon reading this article, you might be inclined to close those retail store credit cards. Resist this temptation as closing credit card accounts could damage your credit score by lowering the average age of your credit cards. Instead, pay off your retail credit cards so the credit-scoring bureaus know you are being a responsible borrower. Then make a commitment to say good-bye to retail accounts.

This guest post was submitted by Philip Tirone, a credit expert who teaches people how to build credit and avoid pitfalls.