The Frugal Creditnista

Should You Buy Christmas on a New Store Credit Card?

Got more holiday shopping than your paycheck will allow? Credit cards are a popular option to help Americans afford Christmas. In fact, 40% of Americans will put all or most of their holiday purchases on a credit card this year. And on average, the average American plans on spending about $886 on gifts this year. 

Feeling sticker shock? It’s actually not too surprising: the cost of everything has risen considerably this year due to the pandemic, supply chain shortages, and inflation. To help fill in the financial gaps and make Christmas more affordable, it might be tempting to apply for a store credit card.

Many stores entice new cardholders by offering generous discounts on their first purchase. For example, Target offers its members 5% off every transaction. Amazon offers this same discount, as well as 2% back on Whole Foods purchases. But are all these discounts really worth it?

The answer is yes. And no. 

Here’s what you need to consider before applying for a store credit card.

New Store Credit Cards Make Christmas More Affordable Upfront

Simple math tells us that we can save money on our purchases from a specific store if we apply for their credit card. For example, if you were planning on spending $100 on gifts at Store X and the cashier says you can save 20% if you get a credit card, then you’re saving $20 off the top. You might even go back into the store to get $20 worth of goods that would essentially be free.

This can be a good way to stretch your holiday dollars even further. But it doesn’t stop there, and that’s what any new cardholders need to be wary of.

Only Charge What You Can Pay Off Immediately

Store credit cards charge interest just like any other credit card. The difference is that interest rates are usually higher (much higher). On average, the interest rate of a store credit card is 24.15%, compared to a 20.09% interest rate of a regular credit card.

On a $100 purchase and a minimum payment of $20, you’re left with an $80 balance. Next month, you’ll be hit with a $19.32 interest charge, bringing your total to $99.32. That means you’ve only decreased your balance by $0.78, even though you paid $20. At this rate, it can take years to repay that $100! 

Your best approach is to only charge what you can afford to pay off at the end of the month. Otherwise, your “affordable” Christmas can make you go broke.

Store Credit Cards are Easy to Get, Even with Bad Credit

If a regular credit card is out of reach because you don’t have great credit, you still might qualify for a store credit card. The bar to entry is much lower and existing credit score matters much less. 

However, even with approval, there might be tradeoffs. For example, store credit cards often set lower spending limits. You might only be able to charge $250 before you reach your limit. Plus, interest rates are higher. 

If you’re saving 10% with the credit card discount, that’s an extra $25 of wiggle room you’ll have in your purchases. As long as you pay off your card on your first payment, you won’t be subject to the high interest rates. Plus, it could help you build up your credit if you plan on continuing to use the credit card. 

A New Credit Card Affects Your Credit Score

Taking out any type of credit card will affect your credit score. It shows up as an inquiry on your credit report. Any hard inquiries on your credit report will usually lower your score by a couple of points. If you are trying to build up your credit score, taking out a store credit card might not be the best approach, especially if you do not plan to use it beyond Christmas. 

Closing a New Credit Card Also Affects Your Credit Score

Many holiday Shoppers will take out a store credit card with the intent to pay it off immediately and close the account. All they're really after is the one-time discount.

While this does seem like an attractive idea, remember that closing any type of credit account may negatively affect your credit score. It changes your mix of credit accounts, plus it changes the average age of your accounts. It also impacts the amount of available credit to your name and your credit utilization rate. All of these things go into credit scoring.

However, closing a credit card does not affect your credit history, which is also part of the credit scoring puzzle. Shoppers need to understand whether the one-time savings are worth the short- and long-term impacts on their credit score. 

Don’t Get Too Many New Credit Cards at Once

Another strategy I see a lot of is shoppers taking out several store credit cards during the holiday season to capitalize on those discounts. They’re stretching their budget as far as it will go, and they do end up saving a good bit of money that way.

But it’s usually not worth the impact on your credit.

With every new credit card, your score takes a hit. Five credit cards mean five hard inquiries. Those will stay on your credit report for years. Your score might drop 10 points or more!

Plus, more credit cards mean more payments to manage and more interest charges to drain your bank account. What you saved upfront is usually spent on interest (and then some) if you don’t pay off your balance. 

The bottom line is this: store credit cards can be an excellent strategy when used in the right way. Just make sure that you were able to sacrifice a few points on your credit score and you have the means to pay off the balance on your first bill or two. Otherwise, the savings won't justify the hassle and expense. 

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