How many of us have some?
Cards we can depend
How many of us have some?
Before we go any further, lets gets some
How many of you recognized my revision of the lyrics to the song “Friends” by Whodini? I thought the song apt because we’re about to talk about something you might need just as badly as good friends before all is said and done: a good credit rating.
If you want a car and you need to take out a loan, the dealer is going to run (i.e. look up) your credit score. Want a house and you need to borrow funds from a bank? The bank offers the best rates to people with excellent credit scores. A good/excellent credit rating could mean you save hundreds to thousands of dollars in fees in paying off your debt.
Over at the Everygirl, their Contributing Finance Editor, Brittney Castro, CFP®, wrote a post saying that people should just avoid opening up store credit accounts. Her argument begins:
“First things first: Please remember that stores would not offer you something unless there was something in it for them. Even though store credit cards usually offer a discount of about 10% on all store purchases, they also usually carry a high interest rate of about 20%. If you make a purchase using the store credit card and then don’t pay off the balance in full at the end of the month, the store will make back the discount and then some. If you do have enough discipline to pay off the card in full at the end of the month, the savings can be worth it. But most people don’t, making this strategy a risky bet.”
Ms. Castro goes on to say that having a store credit account makes it easier for you to spend more money than your budget allows. In conclusion, Castro decides that store credit accounts usually aren’t of benefit to the customer.
I take a more nuanced approach to the issue than Castro.
First of all, store credit accounts may require a lower credit rating to open an account than credit cards offered by banks. Even high-end retail stores probably have higher credit requirements than affordable/budget retailers. So if a person has a low credit score or has little credit at all, it may be necessary for that person to open a store account in order to build their credit. And you’ll probably need to build credit using store accounts or other revolving credit accounts in order to build your credit so that you can eventually get lower rates on a house or car purchase.
If you shop frequently in a particular store that offers special perks exclusively to card holders then even if you do carry a balance over for a month or two on the card, getting the card may save you money and allow you to purchase items before the store stops stocking them. For example, that leather jacket that your favorite store only stocks for a few weeks in the Fall? A credit card will allow you to make the purchase and pay it off over a few months.
The key about using credit–any kind of credit–is to use it responsibly. Try to keep your balances at less than 50 percent of your available credit. Use cards that earn you rewards for your purchases–if you have to put gas in the car use a card that earns you rewards on gas purchases. Pay off your balances as soon as possible. Keep inquiries (i.e. when a company looks at your credit score as a prerequisite to offering your credit) to a minimum. And most importantly, educate yourself about how credit works and how to make it work to your benefit.
Do you use store credit card accounts? Do you think these accounts help build your credit or just make it easier for you to make a mess of your credit?
Jamila Akil is a Community Manager at Beyond Black and White. Follow her on Twitter @jamilaakil