There are plenty of temptations during the holiday season — ranging from holiday parties and the extra food and candy hanging around your office to a barrage of seasonal deals from retailers. Overindulge in the first category and you will pay with an increased waistline (and possibly a throbbing head). Overindulge in the second category and you are more likely to pay with an increase in your credit card count (and balances).
Signups for private label credit cards tend to increase during the holiday season, as retailers often enhance their offers with further discounts for purchases made with their store credit cards. A new study from the credit bureau TransUnion shows that within certain retail segments, the rate of signups double during the month of December.
What is a private label credit card? You probably think of them as department store credit cards, but the classification extends beyond department stores to gas stations, hardware stores, online retailers, wholesale outlets, and even jewelry stores.
A private label card simply means that the card is branded by a typical retailer and is only good for purchases at that retailer (not for general purposes). Private label cards are not issued through national processors such as Visa and Mastercard, and will not contain any such logo. They operate in the same fashion as a general-purpose revolving account, with interest charges on balances at a specified annual percentage rate (APR).
The TransUnion study found that three private card segments see major increases in signups during December: online stores and discount retailers see a doubling in the rate of new credit card accounts while jewelry stores see an 80% increase. These seasonal increases have pushed the total number of consumers holding retail cards to 125.3 million as of Q3 2016, and the 2016 holiday season seems likely to show a typical increase.
Retailers have great incentive to sign you up for a store credit account, as they typically find that their cardholders shop more often at their stores than average customers and spend more when they do so. In some cases, the store brand credit card is responsible for over half of annual sales.
Since retailers generally have information on your spending habits, with store cards they can entice you to buy more through their stores with targeted deals and loyalty programs. They can also offer credit to people who may not qualify for traditional credit, blunting the risk by keeping credit limits relatively low. TransUnion's study confirms this premise, finding that the largest increase in store card applications came from those with fair or poor credit scores.
Did you find the temptation of a store credit card too much to pass up? There's nothing wrong with such an indulgence, as long as it fits in your overall credit plan — and you do have one of those, don't you?
Check the limit on your store card, because they usually contain low limits to offset the risk, and using most of your available credit on one card can damage your credit score. Read and understand the terms carefully, as terms on private label cards may vary significantly from general-purpose cards.
By keeping your balances low across all credit cards and making sure that you don't use your store card as an excuse to overspend, a new store credit card could actually help your credit score. With no or low balance on the store card, the extra credit increases your collective credit limit and lowers your credit utilization (the amount of credit available to you vs. the amount that you use).
Unfortunately, we have no advice for overdoing holiday food and party indulgences, other than spending time on a treadmill, and perhaps a few apologies to coworkers and superiors.
If you want more credit, check out MoneyTips' list of credit card offers.