By Steve Kautz, former Maine mathematics teacher and personal finance expert.
I’m not really sure where to go with this. A recent shopping experience inspired me to talk about this modern consumer classic; “Would you like to save 20% on your bill today by signing up for a Kohl’s card?” But as I outlined my thoughts and did a little digging, I got off onto a few tangents. It’s easy to make the case that using department store cards is generally a bad deal for your credit and your finances. But there is more to it than money. It’s also about how you choose to live in our economic system. AH HA! An idea for a future blog entry (the ‘there is more to it than money thing’ ― I’m already looking forward to writing that one).
Get Back on Track, Kautz
Ok, Kohl’s. As I’ve said before, I have no ax to grind with credit card companies, or with companies who are doing what they are supposed to do for their owners and stockholders ― maximize profits. It’s up to us to do what we are supposed to do to take care of our own bottom lines. So, Kohl’s, I’m not here to insult you, just your credit card offer.
If you are not familiar with it, here is how it goes down. You bring $73 worth of already “discounted” clothes to the cashier, who then proceeds to drop the line (see 1st paragraph, 2nd sentence). You could just say “no,” and skip the rest of this article.
But you are tempted. You think to yourself, “hmm, 20%… that is like… more than 10%… which is probably like… it’s 20% ― wow!” Or, you are a mathlete and you quickly calculate the $14.60 savings opportunity. Keep that number in mind. $14.60. You hesitate to accept, but the cashier ups the offer by saying you’ll also receive monthly coupons (which you can get anyway just by providing an email address). Then something is said about an additional $5 off the next time you shop.
The next conversation you have with yourself goes like this: “I might as well. I mean, I won’t use the card. I’ll just take this free $15 and throw the card out (in fact, I should grab another $100 worth of stuff since it’s 20% off). And if I use it I certainly will pay it off right away so I would never pay interest. No harm done, good deal for me.” ( I sound like me back in the day).
All right, stop. Concentrate and listen, this is a credit intervention. Come on, if people actually took the discount and didn’t use the card, would they be offering the 20% discount?
So, here is the first reason you shouldn’t get the card (or almost any card). Statistically you are likely to use the card, and you are likely at some point to run a balance on the card, and, yes, you are likely to pay interest. Which leads beautifully into the next reason. 23.99% interest! Enough said about the second reason. Next, applying for the card triggers what is called a “hard inquiry” into your credit and it will ding your credit score. Not a lot, but if you can’t pass up a $14.60 discount, you can’t afford to lower your FICO score. There is more. You will likely buy something (probably many things) that you don’t need, and you will bust your budget and be sentenced to read my previous two entries again and again (sorry).
Your Credit Score Says, “Ouch, Stop Hitting Me!”
These cards typically have low limits, and, as already mentioned you are likely to run up a balance on the card. When you run up a balance you change your “credit utilization” ratio. This measures how much of your available credit you are using. On these low limit cards it’s all too easy to be over 50%utilized. This will lower your credit score.
What’s that you say? You will just take the discount and then cancel the card? Ok, but you have still lowered your credit score because of the “hard inquiry.” I guess if you are in a position where credit score truly does not matter to you, then take $14.60 savings, buy me three vanilla lattes, and look for a future article where we discuss whether loyalty cards, email discounts, excessive coupon clipping, and credit card sweeteners lower our quality of life.
Told You Before ― I Like Numbers
Honestly, if the Kohl’s situation was isolated, it really wouldn’t be that big of a deal. But, of course, it is not. The profile of the department store cardholder is that they have several similar cards, and each one lowers the credit score and clears a path to overspending and much deeper trouble. An all too typical and painful scenario is when a person, through the use of too many cards, has lowered their credit score just enough that it pushes the interest rate on their mortgage up by 1%. On a 30 year, $150,000 mortgage, that 1% just cost you over $30,000 in interest.
$30,000/$14.60 = you’d have to open 2,054 awesome charge accounts to offset that little inconvenience.
When I visited Kohl’s the other day, I politely declined the credit card and email offers, and paid for my nephew’s birthday present and my son’s pajamas. Notice I said “politely.” Cashiers are just doing their job as instructed. Maybe they have a stake in it, like a commission or bonus of some sort for getting us to sign up. Either way, and no matter how much I’d like to make a counter offer in the form of this blog entry, I politely decline.
After paying for the goods ($52.20 total, for a bagfull of stuff from the clearance racks), the cashier tells me that I saved $171 by shopping at Kohl’s today. What?!? I saved $171! Now I am offended. The thought that someone would have paid $223.20 original price for this stuff is ludicrous, and the subject for another day. Then she hands me a $10 coupon (because I spent $50), as good as cash, for anything in the store. Reason number 64 to not sign up for the credit card at these stores; they exist in a constant, seemingly desperate, cycle of discounting and couponing, and you’ll stumble into that $14.60 in savings just the same. I returned to Kohl’s a week later and used my $10 coupon to buy two more outfits for my son which had been marked down to $4.00 each. Pajamas with trucks on them. Score.
The views, information, or opinions expressed in this blog are solely those of the author and do not necessarily represent or reflect those of the Maine Jumpstart Coalition for Personal Financial Literacy.