Shop at a major retailer between now and Christmas and there’s a good chance the clerk at the register will offer you an instant discount – 10 to 20 percent off your entire purchase – if you apply for the store’s credit card first.
What should do you do?
“I know that it's very tempting, but always say no,” advises Beverly Harzog of credit.com. “It's just never, ever a good idea to try to get approved on the spot when you haven't even read the fine print.”
Some retailers offer their version of a Visa and MasterCard. Others, like Macy's, Saks, Ann Taylor, Gap and Best Buy, also have their own credit cards that can only be used in their stores.
If you're a regular customer, you may want to take home the application (yes, you’ll miss out on the instant impulse savings) to see if the card makes sense for you. The private label cards often offer special deals that aren't available to the general public.
Just remember this: Cards offered by retailers tend to be one-size-fits-all. They have the highest interest rates – usually 10 points more than a regular credit card – even if you have a good credit score.
“The terms of these credit cards are actually very poor,” says John Ulzheimer with SmartCredit.com. “The interest rates are almost always in the mid-20s and the credit limits to start are almost always below a thousand dollars.”
Ulzheimer calls these the sort of terms that are offered to people with really bad credit. “You would never accept these terms on a general use credit card like a Visa or MasterCard, but we gladly accept them for a retail store card.”
With an interest rate in the mid-20s, an unpaid balance could easily erase any savings you'd get if you applied for the card to get the instant discount.
Why not apply for the card, snag the savings and never use the card again? That seems logical, but any time you apply for credit it lowers your credit score a little. It may be only a couple of points, but you can’t be sure.
“You don’t know what you don’t know,” warns Ulzheimer. “You have no idea what’s going to happen to your score.”
What it your score drops just enough to put you in a less attractive rate tier? You could wind up paying more for all of your credit, including credit cards, future car loans, even a mortgage refinance.
“Whatever discount you got the day of your shopping is meaningless in the grand scheme of things if you’re paying more interest during the life of the loan that you’re taking out,” Ulzheimer cautions.
Worse yet, if your score is already on the borderline and that new credit account drops it even lower, you could be rejected when you apply for credit.
Remember: Canceling the card after you get the discount won't help. Any damage that’s been done to your score is done. Closing the account does not reverse that.