Particularly if you’re making a large purchase.
The sales clerk starts in on the “Save 15% if You Sign Up Today!” patter, and it sounds awfully tempting. After all, 15% will certainly help the bottom line.
But store credit cards can be dangerous. Though they certainly have their place, it’s important to not make your decision about a store credit card on the spur of the moment. Here is some of the fine print that the sales clerk doesn’t tell you:
The interest rates are through the roof. Regular credit cards have an interest rate of around 14%. But store credit cards average 25%. This makes no difference whatsoever if you’re going to pay off your balance each month, but of course the store is counting on the fact that most people don’t do that. And if you’re paying an interest rate of 25%, your 15% savings on that initial purchase really doesn’t help at all.
Surprising Credit Score Effects
Low credit limits can equal a low credit score. Most store cards have relatively low credit limits—generally about $1,000. That means that having one (or several) could negatively impact your credit score. Here’s why: your credit score is calculated based on the amount of available credit you have used. The rule of thumb is to have your statement balance be no more than 30% of your limit. With a $1,000 limit, it might only take one shopping trip to go over that 30% mark, and carrying that balance will hurt your credit.
Having a store credit card can tempt you to spend money you don’t have. If you’re a regular shopper, it can feel like free money to use a store’s card rather than your regular credit card or cash to splurge on something. And the stores try to capitalize on that temptation by giving out discounts and promotions to card-holders. But you’ll still have to pay the bill once the shopping spree is over—and will the cute new boots or shiny flat screen still be such a deal when you’re forking your money over for the bill?
Using a Store Credit Card Wisely
With all that, it can make you wonder if it’s ever a good idea to sign up for a store credit card. Of course, it is possible to use store credit cards responsibly. And it can even help someone who is first establishing (or re-establishing) his credit. Because store cards tend to have looser credit requirements, people who might have trouble qualifying for a traditional card still have a way of building their credit history.
For example, my stepfather always likes to tell the story of how he established his credit (with no history whatsoever) when he was living on his own as a young 20-something. He needed a washer and dryer for his new apartment, so he went to a department store, signed up for their store credit card, and purchased the appliances. He wasn’t able to pay off the balance the first month, but he made sure he had it paid off within three months. After that, he had a stellar credit history and qualified for a car loan and a traditional credit card. And he’s kept his credit score up for the past 30-some years.
The important thing to remember with store credit cards is that the company wants you to make a split second decision without taking the time to think about it. Then they want you to keep coming in with the card to spend more and more. You are in charge of your finances, and there is no time limit on making good money decisions.
Photo by jelene