Credit cards and the problems with instant credit

Suppose you are at your neighborhood department store, getting ready to purchase a thing or two that you saw at a low price. You head on up to the cashier and pull out your checkbook, or possibly a Visa or Mastercard. The kind cashier notifies you that if you are willing to apply for the retailer's credit card, you can receive a discount of ten percent on your purchase right now. You accept and agree to take their card, and the sales clerk assures you that the process will take just a minute.

The process is wrapped up in a short period of time. You then add your purchase to the new credit card and obtain your ten percent discount.

Is signing up for immediate credit at a department store a wise thing to do?

You don't want to just apply for a charge card without thinking about it, and you certainly don't want to be lured in by a tiny price reduction on a single purchase. Applying for instant credit may or may not be wise, depending on your own financial situation. In general, credit counselors urge all consumers to carefully decide whether or not to acquire new financial obligations. Many department store credit cards have substantially higher interest rates than the major credit cards, such as Visa or Mastercard. Interest rates on retail store credit cards may be greater than 20%. And what if there's no grace period on purchases? You may have received a 10% price reduction, but you may be coughing up 25% interest on the purchase from the minute you walk out the door! Do you know? Did you bother to check before accepting the charge card? Once you have the card, will you make use of it? Should you use it, you might end up spending a lot more in yearly interest payments than if you had just said, "No, thanks" and used the Visa or Discover card instead.

Too much credit activity can be a problem if you are preparing to buy a house and you need the best available interest rate. That department store charge card you applied for could, in the right situation, affect the interest rate you get on a home or a car loan. Every time you apply for credit or a loan, it puts a small "dent" in your Credit score. The credit bureaus consider it a bad thing to have consumers applying for credit over and over again, and they indicate all financial inquiries on the credit report. It is quite simple to fall into the trap of just accepting credit cards every time you have one offered to you. A large number of applications in a limited period of time can impact the score significantly. There are other considerations other than the interest rate and the grace period.

In the end, you will save a lot of money by not using the high interest card that you didn't really want originally. Having your credit score harmed is far more important than saving ten percent on your current purchase. As a rule, you should stay away from these point of sale offers and stay with conservative, well thought out financial planning.