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Building Credit

The Only Reason to Open a Store Credit Card

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

storecard

 “And would you like to open a [insert store] card today to receive an extra 10% off your purchase?”

We’ve all heard this upsell strategy. Store credit cards seem to be available at just about any place you exchange currency for goods – except for maybe Seven-11.

For years I firmly shook my head and said, “thanks, I’m all set for today” without ever considering the possible advantages of opening a store card.

Then Banana Republic got me thinking about using a store card to increase my credit limit thus driving down my utilization to improve my credit score.

Why I got a store credit card: to improve my score

The moderately-expensive store was offering 40% off most of the store which could be coupled with any discount already bestowed upon sales rack items. While trying on clothes, I overheard the dressing room attendant mention if you opened up a Banana Republic credit card, you’d receive 30% off a full-priced item and an additional 10% off everything else.

Like most shoppers, I looked down at the massive stack of clothing I had my eye on I started to do the math. All those discounts could net me over $600 worth of clothing (at it’s original price) for $120. While weeding through the dresses, blouses and pants I started to do another math equation.

If I opened a store card, I would be increasing my overall credit limit. I could use the card for one purchase a month – or none – thus lowering my utilization. A utilization rate below 30% helps prove you aren’t a risky borrower and can increase your credit score. So, if my overall credit limit went from $5,000 to $8,000, and I continued to only spend about $1,200 on my cards each month, I could lower my utilization from about 25% to about 15%. Plus, establishing and using another line of credit responsibly would help improve my overall score.

The opportunity to improve my score, and maybe a little bit of the discount, convinced me to open up a store card — which now sits my hypothetical freezer.

The application process was painless and required I give certain personal information, like my address and social security number, to the cashier. Within a minute I’d been approved. Store cards are ideal for people trying to build their credit from scratch or anyone rebuilding a botched score.

Low scores get approved for store cards

You don’t need to be part of the 700-prime-score-club to get approval for store credit cards. In fact, banks approve much lower scores for store card than they would normally allow if you just walked into a local branch or applied directly for a bank credit card online.

The reason being, banks promise retailers a certain approval rate (perhaps people with a score of 550 or higher), which then requires the banks to approve customers they’d normally consider risky.

Opening a store card is an ideal way for someone with a lower credit score to begin rebuilding his or her credit.

Getting approval for the credit card increases a person’s credit limit thus driving down their utilization ratio as well as diversifying their types of credit. But it only helps if you use the card wisely – perhaps by simply tucking it away. If you do plan on using the card for affordable purchases,  it can still be used at any store – not just the one with the logo on the front.

Just beware: when you apply for a store credit card, there will be an inquiry on your credit report. If you want to see where you have a good chance of getting approved for a credit card but do not want to hurt your credit score, consider using a tool from CreditCards.com (you can visit the tool on their website by clicking this link. With this tool, a soft pull that doesn’t hurt your score is pulled and you get to find cards where you have higher approval odds. This might be a good stop before a store card.

Be careful about making purchases on a store card

Just because you have the card doesn’t mean you should be swiping it. Stores (and banks) will entice you to spend on their card by giving all sorts of promotional offers like sales, special discounts or reward points.

Don’t fall for these traps. Seriously. Seeing those promotional offers should set off alarm bells in your head – kind of like when you’re watching a horror movie and want to scream at that stupid character walking into a creepy, dark house.

Store cards have high rates, so if you get caught in a debt cycle it will not only hurt your credit score and history but also attack your wallet. Only use a store card if you’re able to pay a purchase off in full each month.

How you know your credit score is increasing

Not many people send snail mail these days, but banks still love direct mail. Once you start having a mailbox stuffed with credit card offers, you’ve been tapped into the “credit-worthy” group. The first round of mailers might be from sketchy-sounding companies, but it just means you’re on the rise.

Once your score hits a pleasing 680, you’ll be bombarded by offers from well-known credit card companies.

Know yourself and your limitations

Store cards are a simple way to increase a low credit score, but be honest with yourself before signing up. If you tend to easily succumb to sales, discount deals, and promotional offers then perhaps this will end up putting you in debt instead of improving your credit score.

Would you consider opening up a store card to help your credit score?

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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Building Credit

What Makes a 700+ Credit Score?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

whatisacreditscore

Three little numbers known as a credit score will determine a lot of your financial life. Credit scores help lenders assess your “risk factor” and unlike high-school girls, lenders aren’t interested in dealing with a risky bad boy. The lower your credit score, the more likely they think you are to default on a loan, make late payments or jet off to a foreign country and assume a new identity.

I first learned my credit score in a small, back-alley realtor office in New York City. My roommate and I were struggling to find a clean, safe, rodent-free apartment with an affordable price tag for two young twenty-somethings.

The realtor insisted I fork over $30 to run a credit report for my prospective landlord. After giving her my weekly food budget, I was informed I had a score in the 700s – which was apparently good enough for my landlord-to-be to deem me responsible.

At the time, I had no idea what the score meant or where it had come from.

The answer: through the diligent use of a credit card in order to establish credit history.

What goes into a credit score?

Fair Issac and Company (or FICO) – who owns the definition and scores credit – uses five different factors to assign you a credit score.

  • Payment history (35%): do you make payments on time? Missed payments can crush your credit score quickly

  • Amounts owed (30%): the more debt you have, the lower your score.  But even more important than the total amount you owe, is the amount you owe in relation to your total credit limit –which is called utilization.  If you max out every card you have, you will get punished

  • Length of credit history (15%): the longer you’ve had credit, the better

  • New credit (10%): this looks at how many new accounts you have opened, and many times you have applied for credit.

  • Types of credit used (10%): the more types of credit you have, the better.  So, someone who has successfully managed a car loan, a mortgage and a credit card would score better than someone who just managed a credit card successfully

What’s a good score?

The higher your score, the better the deals you can get from banks and lenders. FICO typically calculates scores between 300 and 850. You should strive for a 700+ credit score.

Why do I want a score above 700?

A score of 700 essentially puts you in the “prime” group and open up opportunities that aren’t available to other consumers including:

  • When you buy a home, you will get the best mortgage rates

  • When you buy a car, the 0% financing from manufacturers will be yours

  • When you apply for a credit card, all of the best bonus and introductory offers will be waiting for you

  • When you apply for auto insurance, you will be considered more responsible – and get better rates

  • When you apply for a job, you will easily pass screening that regularly includes credit scoring

People in Club Prime are diligent about paying on time, use less than 30% of their available credit (also called utilization) and have at least a three to five years of credit history. They also tend to have a good mix of credit instead of just credit cards or just student loans and don’t apply for lines of credit on a regular basis.

Why am I not “prime”?

There are two common reasons for why you may not have a credit score above 700.

  1. If you’ve shunned credit or are young and just entered the workforce then you don’t have enough history to have established a high credit score.
  2. If you’ve been using more than 30% of your utilization ratio, making late payments or missing your payments entirely, and applying for new forms of credit are all factors that can keep your credit score from moving into 700 range.

Check out 6 simple steps for improving your credit score.

Don’t be discouraged by a low score

If you’ve struggled with your financial situation, don’t be discouraged by a low credit score. They are fixable. It may not be easy at first, but taking simple, actionable steps you can begin rebuilding your score and eventually become a member of Club Prime.

Do you have a story to share about credit scores? Let us know in the comment section or email us at info@magnifymoney.com.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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About MagnifyMoney

We Are Here For a Reason

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

TeamShot2111

Before creating MagnifyMoney, I spent my career in banking, working mostly with large multi-national banks like Citi and Barclays. Most recently, I ran the consumer credit card business of Barclays in London.

Barclays has an amazing history. Created in 1966, it was the first credit card company in England and one of the first in the world. What began in a small office in Northampton, became the number one card issuer in the UK – and makes nearly $2 billion a year globally.

I had the privilege of meeting the team that created this business in the 60s. You still see the twinkle in their eyes as they talk about those early years. When they describe what they did, they don’t mention revenue, earnings or market share. They desperately wanted to find a way to make it easier for small businesses on the Main Street to accept payments, and they wanted to make it easier for everyday people to buy things. I could imagine the founders of Barclays feeling comfortable working at PayPal, Square or any of the other payments start-ups, because they weren’t afraid to push boundaries, solve real customer needs and have fun doing it.

When the first Barclays was launched, it had a one page set of terms and conditions.  I met with a woman (still working at Barclays) who had cataloged the history of the fine print. For the first 30 years, the product was relatively simple.  But, starting in the late 90s, the fine print grew exponentially. The focus shifted from making payments easier to growing profits. Earnings growth would come not only from acquiring new customers. A bigger focus would be making more money from existing customers. This shift was not unique to Barclays. The credit card industry – in both the US and the UK – began to adopt tactics that would have made the employees from the 60s cringe.

What were banks adding in the fine print?

Things like:

  • Risk-based re-pricing: the ability to increase your interest rate (on your existing balance) based upon an opaque algorithm.  Reasons for being considered risky could include using your credit card.
  • Multiple interest rates for multiple types of transactions.  A purchase APR that is different from a cash advance APR that is different a go-to rate after a promotional APR. Yes – every new APR added was usually higher.
  • Extraordinarily complex definitions of grace periods (the period where no interest is charged) and interest-free periods. With double-cycle billing, it could be very difficult to finally stop the interest from being billed
  • Multiple fees, and fees that cause fees (know in the industry as a pile-on). Your payment is late. A late fee is assessed. The late fee causes you to go overlimit. So, an overlimit fee is assessed. Balances are capitalized daily. So, interest starts accruing on the fees.
  • Not to mention the shoddy insurance products that were cross-sold on top – the list goes on

A lot of those practices are now illegal, thanks to the CARD Act in the US and the Consumer White Paper in the UK. While a lot of practices have been eliminated, a ton of fine print still exists. Have you read your card agreement?  You will still see many fees, many different interest rates, a different version of risk based pricing and more.

Too much of your money gets lost in the bank’s “terms and conditions”  At Magnify, we have one goal- show you how to get it back.

Credit card businesses are still churning out record profits, with returns greater than 25% a year. How can a 50+ year old industry, loaded with data and competition, still provide returns of that magnitude? In our survey, 42% of Americans have average debt of $10,902. 75% of them pay more than 15% interest per year. Think about it: over $1,500 spent every year on interest payments.

Why do people pay those high interest rates and fees?

I believe there are 5 reasons:

  1. They don’t realize how high their rates are. Until the CARD Act, it was easy for credit card companies to increase interest rates without a whole lot of disclosure. People may not even know they are paying 29%.
  2. They don’t know how to get their rate lower. After paying the minimum due every month and watching the balance stay at the same level – they don’t know where to begin, and feel trapped.
  3. They are afraid to shop around, because of what it could do to their credit score.
  4. They don’t understand how the fees work, so find it difficult to avoid them.  And trust me – often we in the banks didn’t even realize how the fee was charged, because it was so complex.
  5. They are just so busy with their life, that they don’t have time to think about how to reduce the interest rate on their debt.

People work hard for their money, so banks should work just as hard as your local shop does for your business.

At MagnifyMoney, we are going to make it easy for people to compare products and save their hard-earned money with confidence. Our brand will be built upon the trust that we must earn. Our success will be measured by the money we save for you. Given that I spent the last 15 years growing earnings and generating fine print, I believe we are uniquely positioned to help you navigate this overly complex system.

I left my job to create MagnifyMoney with my best friend from college. We believe that we can take $1 billion off the bottom line of banks – and put it into your pockets – with over $1,000 to the average American family. That may seem like a big number, but it is just a tiny percentage of the banks’ total earnings.

Right now, MagnifyMoney is not generating revenue. Going forward, we may get paid by some banks, credit unions or new entrants for referring business.

MagnifyMoney will always make the following commitments:

  1. We always recommend the best product. We have compared over 300 credit cards and 500 bank accounts at the time of launch.  And, unlike a lot of websites, we will not put products at the top of our table because of a commission.
  2. If we are getting paid – you will know. You will see clearly on the table when and if we are getting paid
  3. If anyone finds a better deal – even if it from some small one-branch credit union – let us know and we will add it. Nothing makes us happier than a small competitor giving the big banks a run for their money.

Since I left my job last year to dedicate myself full-time to building MagnifyMoney, I have spent a lot of time meeting with banks and explaining our plan. The banks have been cordial, some have even been welcoming (because they are working hard to improve). But, during one of my early meetings, someone told me to “be careful. Too much transparency is not a good thing.”

At Magnify, we respectfully disagree. 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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