With some of the biggest gift-giving holidays coming up, merchant cards are back in season. These cards you get during your holiday shopping nab you discounts or free stuff, but do you know that there’s also a hidden risk to using them? As a borrower, your credit rating is one of your most valuable assets. If you mess with that, you ultimately make yourself unfundable. Learn how to best protect this all-important asset when you go shopping this holiday season.
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How to Ruin Your Credit…And Save 10% On Your Next Purchase
We’re talking about the holiday season. This is going to happen all year round, but people are especially susceptible to questionable borrower behaviors during the holidays. Sometimes we spend a little bit more than we normally would other times of the year because of our gift-giving, the things that we want to do to take care of our families and our loved ones. I’m going to go through a few landmines to watch out for and ways to do it well. Ways that you may have done in the past where you’ve literally blown up your fundability and over time, you decreased the value of your borrower profile. First things first, as you can tell, the show was labeled, How to Ruin Your Credit and Save 10% on Your Next Purchase?
Invariably, all year round, especially during the holidays, lenders who are backstopping or carrying the paper for merchants all around the country, they want to get new cardholders. What do I mean by lenders who are carrying the paper? Let’s say you go to Target or JCPenney, pick any mall store card, any card that’s offered on the internet. When you get to the register, they say, “I’ll give you 10%,” sometimes it is 15% or every once in a while, 20%. “I’ll give you 20% off this purchase if you fill out this application.” You’re sitting there going, “I can fill out an application.” The thing is, you don’t necessarily understand what they’re asking or how it’s going to harm your profile. In previous episodes, we covered a little bit about this, but I want to bring it up again during the holiday season.
Merchant Cards: If you have a consumer finance account on your credit profile, you get a downgrade in your fundability.
First and foremost, when you fill out that application, it’s a mall store card. It’s what’s called a consumer finance account. FICO already counts it against you. If you have a consumer finance account on your credit profile, you get a downgrade in your fundability, but because you’re spending $200 to $300 at Target, you’re thinking, “I’m going to save $20.” What you don’t understand is that $20 is like stabbing one of your tires and you’re going to be driving around limping because all of the fundability errors come out of this tire. Can you get around with your credit profile? Yes, but it is hard. It’s annoying. You will not be able to get up to speed. You will blow up your fundability chances. Unless you’re spending $60,000 at Target, then talk to me. I’ll help you navigate these waters because saving $6,000 is a big deal, but I haven’t met anybody yet who’s going to go spend $20,000, $30,000 or $50,000 where this kind of savings is important.
Most of us are always running up against a bill of, “What’s in our cards worth?” I don’t know, $100, $200, $300. It is not worth the $10 to $30 savings that you get by filling out the application. It’s a mall store card. It is a retail merchant card. Part of the reason why these merchant cards are less valuable is its merchandise. Let’s say you buy a sweatshirt for one of your children. That sweatshirt costs $20 to $30 in the store. It costs $2 to $3 for the merchant to purchase it. When you have $1,000 Target, let’s call it Express or Victoria’s Secret. If you spent $1,000 credit limit on that retail card, they only have probably a $100 maybe $200 at risk of the $1,000 “value” that they’re giving you. It’s not real money. Their only loss is 10% to 20% of that credit card limit. That’s one of the reasons why these cards are less valuable as compared to a Wells Fargo cash card where you have a $1,000 credit limit to use light cash anywhere that takes the Mastercard, Visa. That’s treated like cash. That cash is dollar for dollar. A $1,000 for Wells Fargo limit is $1,000 at risk. There’s more value to that card and the more value there is for the card, the more risk there is to the card issuer.
Merchant cards are just additional debt you don't need #GetFundable Click To TweetThis is vital that you are going in and filling out this application, it’s not going to do for you anything for your credit profile. It actually destroys significantly. You will blow up your fundability by filling out that card. If you do 1 to 3 of those cards because you’re going shopping for Christmas, for the holidays, for Thanksgiving on Black Friday, they’re going to offer you terms. The merchants may offer you and ask for credit and we’ll give you a discount. It’s because all of these stores, including the Black Friday offer, when they get you a revolving account, you’re more likely to use it and that pays them interest when you carry a balance. Every time you run that card, the processing company is collecting 2%, 3%, 5% of that purchase.
When you run that card at Kohl’s for $100, $3 to $5 goes into a split between Kohl’s and the issuing bank. Everybody wins on the lender side when you have an extra one of those cards. That’s why they give you rebates. That’s why they give you points so that you can have free merchandise. While all that is fine and good, it is ruining your fundability. Those very credit instruments, those very retail cards, merchant cards are debt, especially when you have too many of them. The other thing that’s important is it makes you look like a consumer, not a professional borrower. You’re picking up credit helter-skelter and that is not a good message to send a lender, especially if you’re looking to be a professional borrower. You’re a business owner, entrepreneur, a real estate investor and you’re looking to create a credible professional borrower profile so that lenders take you seriously and give you the higher echelons of credit of $20,000, $30,000 and $50,000 business lines of credit and more. You’ve got to be a professional borrower to take those down. Having these retail cards on your profile does not do that. It hampers and hog-ties your fundability.
The next thing where there’s a negative impact is when they pull that credit, whether or not you’re approved, you get a 3 to 15 point deduction in your credit score. While it is the third or fourth most important, when it comes to the third or fourth most important metric, it is still in charge of rates and terms. Even where applicable, how high the limit is going to go. We need our score to be high if we’re going to increase our limit amounts, our loan amounts and get the best rates and terms. That inquiry is going to drop your score even if you don’t get approved.
Merchant Cards: You need your credit score to be high if you want to increase your credit limit.
The other thing that I mentioned in our previous episode, if you are approved, you’ll get a new card with zero months on it. This zero month card reduces your average age. The average age, we call it revolving the account’s portfolio. It’s the collection of all your credit cards, charge card and home equity line of credit. It doesn’t have to do with your car loan, your mortgage and your installment loans. This is only the collection of your revolving accounts and those credit cards. Your age is an important feature of your profile. When you get a brand new card, you get a new card with zero months. Let’s say you have one credit card in 100 months. Your average age because there’s only one, is 100 months. If you go get a brand new Target, Kohl’s, Victoria’s Secret, Home Depot or Staples, you go get a new card on your personal profile that’s one of these low-value cards. Your average age is going to be 50 months because 100 plus 0 is 100 divided by 2 cards. You dropped your fundability or the age in half. You took a massive hit to your fundability.
During this holiday season, Happy Kwanzaa, Happy Holidays, Merry Christmas, Happy Hanukkah, merry, happy, fruitful Thanksgiving. Even for Seinfeld fans are Festivus for the rest of us. Whatever holiday you’re celebrating, whatever holiday you’re going out and shopping for, I beg you, unless your pocketbook has to realize the savings, do not acquire any new junk card. If you need a little bit more shopping power, buying power for the holiday season, I don’t encourage consumer debt. If you have to do it, if you’re forced to do it, make sure that you get a tier-one or a tier-two credit card that’s a cash card and there are plenty of those that have benefits, miles and rebates.
You need to protect your most valuable financial asset, your credit reputation #GetFundable Click To TweetTo find out more, read my other blogs at GetFundable.com or keep binging the show because I mentioned in various episodes the different credit instruments that are perfect for your profile. Wherever possible, my holiday gift to you is the knowledge, the awareness to stop stepping on the landmines, to stop blowing up your fundability and to stop doing the things that continue and regularly destroy your fundability. Please protect the most precious and valuable financial asset you have and that’s your borrower profile, your credit reputation. Let’s punch through this season. Let’s hit the New Year with ready to go. If you haven’t done so, go to my website, GetFundable.com. Check out the episodes and buy my book. Make sure you’ve got all the tools you need to make the best decisions this holiday season you can possibly do.
