We’ve seen the situation a hundred times while standing in line to checkout at a store, the person in front of you is asked if they want to apply for a store credit card and get a fabulous discount on their purchase. And you know what happens next, you are going to be asked as well. But should you jump at the offer?
To best answer this question we need to examine why the offer is being made and if this is a smart thing to do.
There can be no question the store is making the offer because it will benefit them financially in a number of ways. The store hopes to make money from you financing purchases but also hopes you will come back to spend more and more using the easy credit. And let’s not forget the high interest rates.
Any discount offered to you at the moment of application and purchase is calculated to be far offset by increased revenue for the company from you using the card.
By it’s very offer, the discount offered, on average, will be offset by higher store profits by getting the store card into your hand. This means the discount will cost people more in the long run. How do we know this, because smart people calculated the affordable discount so they would entice you to make them more money in the long run.
Next we need to look at the motivations of the friendly hourly clerk running the register. That kindly person with a smile is trying to pay bills just like you. And that person has either been told by the company to push the offer, or is making a SPIF (sales performance incentive fund) or bonus, to get people to apply. Their motivation is economically based and not rooted in if this is a good move for you.
So far, all the motivators are based on increasing revenue, from the store to the clerk. Even your initial reaction is based on a perceived economic advantage you may receive right now because of some offered inducement. That’s where the unconscious gears of behavioral economics start grinding.
I think taking a moment to think about why you are being pitched the store card is a great exercise before you go for it.
When I’m standing in line and watch someone accept the card offer from the happy clerk my first inclination is always to yell, “Don’t Do It!” I’ve resorted to just yelling this inside my head rather than being stared at as a crazy person.
But the next time you see someone go for the store card offer I want you to observe what happens next. They never read the card terms and conditions before they apply and jump at the offer.
Credit card offers are complicated documents written by very smart lawyers to protect the company at every turn. Without a doubt, every time someone says they didn’t know the creditor could do this or that to them and I read the card agreement, it’s right there in the agreement.
Credit card agreements are very clear about all the bad things that can happen to you with the card. Creditors lay it all right out there but people never stop to read the terms when the offer is pitched.
When I do a credit card offer review it takes me hours to go through all the details to explain things clearly. Just look at these reviews I’ve written. What kind of normal person spends that much time examining a credit card offer? Yes, I’m probably not normal.
So how can people make an informed decision if the store card being pitched to them is a smart financial move? The simple answer is they can’t when standing at the register. It’s impossible without weighing the risks by reading the terms and conditions. By it’s very nature, the offer and acceptance of the store card offer puts you at a distinct disadvantage.
Store cards have some perks if you use them wisely. They may offer you an ongoing discount or benefit at a store you normally shop at already. And if you don’t carry a balance of more than about 30% of your credit limit and you don’t have more than a few of these cards, it might just help increase your credit score. But keep in mind what a credit score is, it’s just a measurement of who can make the most profit and provide less risk to a future creditor. It is not an indication of being a smart person when it comes to personal finance.
Contemplating the terms of the card and the benefits it will offer you is the second thing you should absolutely do before going for it.
But there are other ways to get store perks and discounts rather than signing up for the store credit card.
So before your brain says you should jump at the offer, maybe it would be a smart idea to get out of line and just mull all of this over in your head for a minute before you make the store and clerk happy by accepting the offer. That would be the smart thing to do.
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