04 Jun Should I cancel this store brand credit card?

Q. When joining a local big box shopping club, I was offered and approved for a store Mastercard that offered 4 percent back on purchases in the store and lower percentages back on other purchase outside the store. I have a credit score of over 700 and have been paying down balances on my existing credit cards to lower the utilization rate. This is my first new card in years. When I received the card, I saw it had an outrageous interest rate of 27 percent. Should I cancel the card, keep it but not use it or only use it for in-store purchases and then pay off the balance each month?
— Shopper

A. Retail store cards and the rewards they offer can be tempting, but as you learned, they’re not always the best deal.

Behavioral studies have shown that having plastic in our wallet usually makes us spend more than we would otherwise, said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

“There is something about using a credit card that masks the pain of spending money,” he said. “This is why it is much easier to pay with credit than it is to use cash or check.”

It can be easy to fall into the trap that many stores attempt to lure us into if we don’t understand how these store cards work, Green said.

Ultimately, the decision will come down to three questions,

First, will you be able to pay off the balance in full every month?

An interest rate of 27 percent is extremely high. To combat this, Green said, if you decide to keep the card open, you will absolutely want to pay off your balances in full every month. It may not seem like much, but carrying even small balances can eat into your cash flow if you pay only the minimum every month, he said.

Second, do you need the extra credit to reduce overall debt for your credit score?

Besides payment history, the biggest factor at play when determining your credit score is the amounts you currently owe.

“Ideally, you want to keep your credit card debt below 30 percent of your overall credit limit. This is what you referred to as the `utilization rate,” he said. “If adding this new credit line to the mix will help keep you below that threshold, then generally speaking, you will want to keep the card open.”

Third, how often do you shop at this store?

Fifteen percent of your credit score is tied to the length of your credit history. This part of your score is the average of all open credit accounts, Green said. Because you just opened this card, it will be the one with the lowest “age” in the calculation.

“Therefore, keeping it open will lower your average age of credit and hurt your overall score,” he said. “However, if you shop at [this store] often enough to benefit from the 4 percent cash back, then maybe keeping the card open will be worth it for you.”

Note the average age of your credit is not the most important part of your score – on-time payments and your utilization rate have a far bigger impact.

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This story was originally published on June 4, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.