The holiday season is upon us and it is a great time of year for celebrating with family. We celebrate the season by giving gifts. Most people, however, do not use cash and will purchase using credit cards or store cards – the old “buy now and pay later” method. Many stores will convince purchasers to sign up for the store cards and receive a 10 to 20% discount off their purchase.
So what’s wrong with that?
Applying for credit cards and store cards will lower your credit score and will lower your ability, or eliminate altogether your ability to purchase a major ticket item, such as a home or a vehicle. Every time you apply for a credit card or store card, they look at your credit report. This is called a hard pull and it means that you will receive a 3 to 5 point lowering of your credit score.
I have had clients that applied for 10 to 20 different store cards/credit cards and lose up to 100 points over Christmas and the holidays. Store cards are the worst, in that their annual interest rate is typically much higher than credit cards – up to 35% APR. And let’s face it, most of us don’t pay off the store cards within 2 to 3 months, so the interest rate does play a factor. The extra you pay in interest rate payments will surpass the money you saved on the original purchase.
In addition to adding to your long-term debt, your score will drop precipitously due to your debt ratios. This is different than adding to your long-term debt in that typically you will be close to the maximum amount they will allow you to borrow. And this is critical to your credit score.
When you’re out there this holiday season, be careful and be aware. Don’t be penny wise and pound foolish.
As Will Rogers once said, “the quickest way to double your money is to fold it in half and put it back in your pocket.”