Resist the Temptations of new Opening Store Credit Card Accounts!!!
It’s happened to all of us. I’m in the check out line of my favorite department store and as I take inventory of my impending purchases, I know I’ve gone a little crazy. I tend to justify spending more if it’s “on sale”, and why is it everytime I shop, the sales are so inviting?! As I lay the heaping pile of stuff on the counter to be rung up, the ever so friendly check out person invites me to save an additional 10%, 15%, or 20% on my purchases today IF, I will only open a store credit card account. It’s simple, easy and painless to apply…. My head does the math. Another 20% would mean a lot to today’s pocketbook and I’m tempted by the offer… But I know better. Being in the credit repair business keeps me accountable and sane at times because I can’t engage in practices I coach others not to do and I know the savings of today, can be the disasters of tomorrow.
So what’s wrong with store credit cards? First of all, new credit from department stores are “soft” credit lines. You get a “ding” on your credit report for opening up a new line of credit. By opening new lines of credit, your credit score may actually go down. Secondly, you’ll take another “ding” because the available limit is usually a low amount and your new purchases will put the LTV (loan to value) of this new card at a high percentage. For example, if I am offered a $500 limit and make a $400 purchase, I am at 80% LTV. Any credit card with an amount charged on it over 40% of the available credit limit, means you will lose points in your credit score each month it’s over 40% LTV. Ideally, you want to keep all your revolving lines of credit (major, store credit cards) below 40% LTV.
A major problem is compound interest. Paying interest on anything does not create an increase in the quality of life. You’re a slave to the interest master. On some major purchases, interest is a necessity, like homes and cars. But is paying double, triple or quadruple the price of an item really worth it on a $25 pair of jeans? A good rule is, if you can’t buy it with cash, you can’t afford to buy it with credit. If you can’t pay for it now, can you pay for it later?
Compound interest is an exciting concept when you’re on the receiving end, but not when you are on the paying end. Let’s look at the example of the Golf Story from the book Debt Hurts, by Will Green and Earl Strumpell http://willgreen.tv/home/index.php?site_config_id=127&page_selection=4611.
Let’s say that you and your friend decide to play 18 holes of golf and on hole one, you bet a dime and agree to double the stakes at each hole. So we’re applying a 50% compound interest principle to this example. By the third hole the bet would be up to $.40 – really pennies. By the eighth hole the bet would be at $12.80 – still not much money. At the twelth hole, the bet is up to $204.80. By the sixteenth hole, $3276.80 and on the eighteenth hole…. $13,107.20! WOW! Starting from one dime, just $.10. Everytime I see this example it blows my mind. Some credit card companies today charge well over 25% interest, and using the example above at a 25% compound rate of interest, you can still see how much extra you could end up paying for one small item. Add to the interest charges, charges for being a slow or late payer and you’ve got a receipe for disaster.
Try to do an all cash Christmans this year. Scale down. Remember the “Golf Story” as you shop!