“Would you like to save 20 percent on your purchase today?”
When a cashier at your favorite department store posed this question to prompt your application for its store credit card you answered, “Sure, why not?”
Application submitted and approved.
But now several months (or years) later, the new cardholder perks have worn off and reports of rising APRs, complex rewards programs and the spending temptation the card creates have settled in and you’re ready to close the account.
Calling it quits may seem like a no-brainer but before ditching your card evaluate your situation to see if you have other options. Here are a few suggestions based on common retail credit card woes:
“The APR is too high.”
If you compare all the credit cards in your wallet, odds are your store card has the highest APR.
The national average APR for retail credit cards is 23.23 percent, according to CreditCards.com’s 2014 Retail Credit Card Survey, which is much higher than the 15.03 percent national interest rate average for general purpose cards.
Paying such a high interest rate can quickly offset money saved through cardholder discounts. However, there are ways to reduce interest fee woes before jumping straight to account closure.
First, don’t carry a balance from month to month. No balance, no interest.
Second, if you have a good credit score and payment history call the customer service number on the back of your card and ask if your interest rate can be lowered.
“The whole purpose of retailers offering you a card is not to save you 10 percent on your purchases, they are hoping to create loyal consumers who will keep spending,” says Todd Mark, vice president of education for Consumer Credit Counseling Service. “Give them a chance to drop your rate before you close the card.”
A third option is to transfer any high-rate store card balance to a lower-rate credit card then stop using the store card so you don’t rack up any more interest costs.
If you go for this option beware of balance transfer fees, which could be 3 to 5 percent of your total transfer amount. If you’re rolling over a high balance, that fee could add a sizable amount to what you owe.
“I’m spending way too much money.”
Store cardholder perks, such as special sales and frequent shopper rewards, suckered you in and now you hold a piece of plastic and a growing debt load that you fear is doing more damage than good.
But don’t cancel your store card without evaluating your overall credit health first. Your positive payment history will stay intact for up to 10 years on your credit reports, but closing a line of credit could raise your credit utilization ratio — the amount of debt you have compared to all of your available credit.
That ratio counts for almost 30 percent of your FICO credit score and if it’s too high your credit score may take a hit. Experts recommend keeping your credit utilization ratio under 30 percent.
However, if your store card is the only one in your wallet blowing out your budget, it may be worth it to take a potential credit hit and close it. Your credit score will eventually recover whereas your financial situation may take years to do so.
But closing a credit account may fail to get at the root of the self-discipline problem.
Take control of your spending by creating a budget and focus on only spending a certain (smaller) amount each month — and not a penny more.
Another option is to leave your store card at home when you head to the mall. If you don’t have the funds, you can’t spend them.
And, to further avoid temptation, if you choose to keep the card open, you can call your card issuer and request a credit line reduction. This may also negatively affect your credit utilization ratio, but it’s an alternative to cutting that credit line entirely.
“I don’t need it.”
A cluttered wallet is not always the best reason to cut a line of credit. All of your accounts have played a role in building your credit profile, even the ones you don’t regularly use.
Instead of eliminating the store card, pay the balance and stop carrying it with you. Tuck it away safely as a reserve.
“It’s an open line of credit that if you need or want later on, you have it,” Mark said. “It’s a lot easier to go back and use what you already have.”
There’s no one-solution-fits-all answer to whether or not you should close your store card, but if you have a credit card you can’t manage you should probably close it, regardless of how it may affect your credit.
If you’re concerned about what will happen to your credit utilization ratio when you close your store card, plan ahead and open a low APR general purpose card before you close the other to compensate for the credit line loss.
As long as you think your actions through you can positively resolve your retail store credit card woes, whatever they may be.