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Bach’s Case Against Store Credit Cards

David Bach, author of the Automatic Millionaire [3] (review [4]), and one of the “new” columnists over at Yahoo! Finance posted an article today giving four reasons to avoid store-branded credit cards [5] you’ll undoubtedly be offered when you’re doing your holiday shopping this year. The four reasons to avoid these cards are: typically higher, on average, interest rate; good chance you won’t pay off the entire balance; you’ll hurt your credit score; and you might pay your bills late. I say that if you are diligent and concerned about your finances (enough to want to read personal finance blogs), you should take the 10% off + whatever goodies they offer 99-out-of-100 times they’re offered. I do agree with Bach in that the stores do peddle them a little too aggressively (I bet sales staff are paid a hefty commission for signups).

Credit card companies work off percentages, that’s why actuaries are paid so much to figure out those percentages. They know that x% will forget to pay the bill because it’s a new card, they know that y% will not pay the entire balance when they get the bill, and they know that z% won’t have any idea that the interest rate is much higher than the average. According to R.K. Hammer Investment Bankers, more than 35% of credit card companies’ income is from late fees, or $43 billion. The credit companies know what they’re doing.

The 1-out-of-100 situation where you don’t want to open up that card is because of reason #3 – opening a new line of credit will negatively affect your credit score. If you plan on purchasing a new car or a new home (or otherwise need to get a large line of credit), you want to stay in as low of an interest rate group as possible (highest possible credit score group) because saving $50 today isn’t worth it if your mortgage or new car loan interest rate increases at all.

However, for the 99% of diligent frugal shoppers, getting that 10% is a safe deal. If you are nervous about cashing those Identity Guard/Protection/Whatever checks from your credit card company because you’re afraid you’ll forget you signed up for the 30-day trial, then getting a store-branded card for the 10% off isn’t for you.