Woman in the process of being offered a Target card
You stop by your local Target to pick up gardening supplies, a new bike, or a flat screen TV. The clerk asks you if you want to apply for a Target charge card and save 15%.
Should you do it?
$800 x 15% = $120.
Were you planning on paying cash for that TV? If so, open the account, pay the balance in full and then close the account. This will affect your credit score*, so only do it if it’ll save you at least $100. And plan your purchases so that you’re not opening new accounts every weekend. The road to debt-free living is paved with good intentions and department store credit cards.
Let’s see how much an idiot Target customer “saves” when she takes the discount and pays it off at typical American consumer speed.
The original balance was $680 with an interest rate of 18.5%. If you make only the minimum payment each month, it’ll take you just over 6 years and cost $1,110.
* The formula for calculating your credit score is the closely guarded secret of Fair Isaac & Company, a publicly traded company that makes money selling its scores to companies that lend money and assess potential borrowers. Having lots of revolving debt (e.g. department store credit cards) reduces your score. If you’ve recently taken on debt, or had someone inquire about your credit, that’ll also lower your score.
Up to a third of your score is determined by your ratio of debt to available credit. Carrying a zero balance on a credit card with a $5000 limit isn’t quite as good as carrying a zero balance on a card with a $10,000 limit. It’s this ratio that makes people hesitate to close accounts. If you’re Controlling Your Cash, charging your expenses to one card & paying it in full each month, your debt-to-available-credit ratio should be fine.
