Happy New Year to you and yours.Â If youâ€™re like me youâ€™ve made a bunch of resolutions that you probably wonâ€™t keep for more than a few weeks.Â However, if you have debt on retail store credit cards then Iâ€™d suggest making a commitment to pay them off and following through.
Despite the predictions of gloom and doom by analysts, retailers did very well this past holiday season.Â And, unless you didnâ€™t go to a mall over the past two months you were solicited for new store credit cards in exchange for a small discount (usually between 10-20%) on your store purchase.Â Additionally, many retailers cut you a break on your purchases even if you used existing store credit cards.Â The strategy, you guessed it, was to get you into retail store credit card debt.
The average interest rates on retail store credit cards is in the 20-25% range which is 5-12 percentage points higher than the average rates on general use credit cards like MasterCard and Discover.Â Those are subprime terms, but theyâ€™re given to everyone who is approved regardless of your credit scores.Â Â Â
What this means is that debt on store credit cards is much more expensive than debt on your Visa card, for example.Â Donâ€™t get me wrongâ€¦debt is debt, but cheaper debt is the lesser of two evils.Â This underscores the importance of being strategic as youâ€™re paying down credit cards.Â Doing it the right way will save you big bucks.Â Doing it the wrong way is good, but not great.
If you ran up a $1,000 debt on a retail card this past Christmas it would take you 36 months to pay it off by making just the standard minimum payment of 4% of the balance.Â And, it would cost you $425 in interest, or 42.5% of the original balance.Â The same purchases on a general use credit card would take 31 months to pay off, with minimum payments, and cost you $205 in interest, or 20.5% of the original balance.Â Again, the lesser of two evils. Â Â Â
Retail store cards also have much lower credit limits than general use credit cards.Â Retail credit limits almost always start out near or below $1,000.Â This means itâ€™s easier to heavily â€œutilizeâ€ those cards because the balance is going to represent a higher percentage of the available credit limit.
A $250 balance on a retail store card with a $500 limit represents a punishing 50% utilization.Â The same $250 balance on a Discover card with a $10,000 limit is an almost meaningless 2.5% utilization.Â This percentage is a major component of your FICO credit score and you want it as low as possible.
Once youâ€™ve paid them off, leave them open.Â Closing them can actually lower your credit scores because youâ€™re eliminating â€œopen to buyâ€, or unused credit limit.Â Having a large amount of available credit is good for your credit scores.Â If youâ€™re worried about identity theft or the temptation to get back into debt, run the card through a shredder.Â I can assure you that renders your card completely useless.Â
Â John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring, and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.
Views expressed are the personal views of the author and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.