The Lowdown on Store Credit Cards
“Would you like to save 10% on your purchases today?” This is something I’m sure you’ve heard, probably repeatedly, on any trip to the mall. If you’re always on the lookout for ways to save money, hopefully to pay down your debt, this probably seems like a no-brainer. Who doesn’t love a bargain? But hold on for a second. You no doubt know that this is the opening to a sales pitch for a store credit card and believe it or not, the cashier may not actually have your best interests at heart. There are a number of ways that today’s good deal can come back to hurt you down the road.
Why You Should Just Say No
- Excessive Interest Rates
Many store credit cards have interest rates upwards of 20%, hopefully much more than you’re paying on your other cards. If you don’t pay the bill in full right away, you’ll be paying a lot more for those shoes than you thought, even with the sweet discount, and you’ll be putting yourself further in debt in the process.
- Credit Score Killers
Even though most store cards have relatively small credit lines and probably represent a small portion of your overall credit picture, they can really do a number on your FICO score if you’re not careful.
First of all, the low limits make it easy to get near your maximum balance pretty quickly, and maxed out cards are something lenders don’t like to see. But maybe you intend to do the opposite—pay for your purchases immediately and then never use the card again. Well lenders, as you probably know, are a funny bunch, and they consider you a risk if you have too much unused credit, too (though not definitive, the ideal credit utilization seems to be somewhere around the 20% mark). Since you’re damned if you do and damned if you don’t, you may be better off not even having the card on your credit report.
If you’re planning a big purchase, stay away from applying for store cards, or any credit for that matter. While one may not make a difference, those credit inquiries can add up quickly, and cost you plenty in higher interest on a mortgage or car loan.
- Promotions and Other Perks
Store credit card holders often receive discounts and other promotions not available to the rest of the world. Now of course you’re wondering why this is bad for you. If you’ve read the above, you’ve seen how what seems to be a good deal on the surface can quickly turn into trouble in the long run. If they can lure you into the store, they can entice you to spend more, and the cycle will just keep repeating. Discounts and coupons are, for the most part, good things, if you’re careful about how you pay for them (hint: not with a store card).
Your store card may offer rewards or cash back if you spend enough. Again, putting yourself in debt or not paying the bill in full will result in interest charges that will quickly negate any rewards you’ve received. Also, if you have another card with a rewards program, you’re probably better off using that one, so you can build up rewards faster.
Of Course, There Are Always Exceptions
If you’re just starting out or don’t have much credit history, you may want to consider applying for a store card. They’re relatively easy to get, and, as long as you use them responsibly, can provide a way to build credit. They should only be used for this purpose, though, not providing a new wardrobe or the home theater/game room you’ve always wanted.
If you’re planning a big purchase, such as furniture or a new computer, you may find that the store offers you the chance to defer payments and interest for six months, a year, or more if you sign up for their card. If you have the cash to pay for it (and if you don’t, you probably shouldn’t be considering buying it now), you may want to consider the offer. Why? You can stash the money in an interest-bearing account, pay off the card balance before the promotional period ends, and keep the rest. A couple of things, though. Don’t even think about trying this if you’re not sure you’re disciplined enough to hold on to the money for that long. And don’t forget to pay off the balance before the end of the grace period. If you don’t, you’ll be hit with interest charges dating back to the day you made the purchase, generally at ridiculous rates.
The bottom line? Shop at your favorite stores all you like (when you have the cash). But if you have another option, tell the cashier you’ll pass on the fabulous savings their card offers.
Photo by kalleeboo
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