One of my very first jobs was selling retail at a store in the mall.
Working usually helps your finances, but that job was one of the causes of my issues with debt. It’s hard to resist buying new things when you spend the workday surrounded by advertising and sales displays.
Self-control becomes even more difficult when you can be instantly approved for a store credit card. I could only give my spiel about the “benefits” of our card so many times before signing up myself.
I paid for that mistake for quite a while.
I’ve become wiser about finances in the years since then, but still can’t go into a store without being solicited to sign up for a credit card. There is always some type of incentive, but is it ever a good idea to sign up for a store-branded credit card?
The short answer is: no. The cons to store credit cards easily outweigh the temporary perks that come with signing on the dotted line. These are the top reasons why you should almost always dismiss the sales pitch and avoid signing up for store credit cards.
1. High Interest Rates
Most types of credit cards average around 16% APR. Store credit cards, on the other hand, are usually well in excess of 20% APR. Stores can easily afford to give you 10% or even 15% off your first purchase because they will make it all back if you don’t immediately pay off your balance.
Also, the high interest rates for store credit cards tend to be a standard number for everyone. This means that even if you have a great credit score, it will not provide you with any benefit when it comes to the interest rate for store credit cards.
2. Increased Spending & Debt
Odds are that you’re in the store with plans to make a purchase. Then, they offer you a discount on your total purchase that day, if you sign up for a store credit card. Once approved, who is actually going to stick with just one or two items? The people who are duped into signing up for the store credit cards are also going to buy a bunch of extra things to “take advantage” of the one-time deal. Not to mention the fact that they now have available credit to use, keeping cash in their wallets (at least for the time being).
As the holder of a store-branded credit card, you will start receiving emails and mailings to keep you up to date on every new promotion. The stores may also send you special coupons. These could tempt you to spend even more.
It is all too easy to get caught up in the moment and be distracted by the “deals.” People forget how they will have to pay back every penny that they spend. And when they don’t, the balances will continue to grow thanks to the large interest rates.
3. Restricted Use
You are not going to see any of the typical credit card symbols on a store-branded one. That is because they are only good for the one, specific store. You may be able to use it for different locations, but don’t bother trying to buy groceries with one of your mall credit cards. Multiple credit cards mean a thicker wallet, more due dates to keep track of, and more bills in the mail.
4. Credit Score
As store cards can only be used for one retail location, you will need numerous cards to do all of your shopping. The big problem with this (besides an overflowing wallet) is that too many credit cards will hurt your credit score. And you will lose some points for the credit card inquiry when you apply in the store.
You may not realize that credit scores are calculated, in part, on a comparison between your account balance and the amount of available credit. Store cards usually have low credit limits. If you carry a balance on these cards, it will negatively affect your credit score because of the low percentage of available credit.
5. Impulse Decisions
Quick decisions rarely tend to be good ones. As someone who previously cajoled customers into signing up for store cards, I remember the quick and streamlined process. Once someone agreed to apply, you wanted them signing off right away. You didn’t want to give them time to read fine print or reconsider. And don’t be too proud about being approved for a store card – almost everyone is approved. It usually takes more time to convince someone to apply for a card, than it does to get them approved.
6. You Will Likely Lose Money On Interest & Late Fees
It’s easy to rationalize that you’ll pay off the total amount due on your credit cards each month, but it doesn’t always happen. Stores know that the odds are in their favor when it comes to credit cards. A large percentage of customers who sign up for cards, will be paying them off for some time to come. Forgetting to pay the bill on time could cost you as much as $30 for a late fee. The amount lost on a minor discount or coupons is quickly regained by the stores as you carry a balance and/or make a late payment.
What credit cards should you sign up for? Try a card that actually gives you long-term rewards. Travel rewards cards are a good example. These types of cards can be used all over the world and have lower interest rates. Also, instead of receiving coupons or discounts that encourage additional purchases, you can score free plane tickets or stays at hotels. As always, the key to benefiting from the use of credit cards is not spending more money than you can afford to pay back. Credit card debt can be a huge problem, but it can be avoided by paying off your balance every month. Only then, do you really benefit from the incentives offered by any credit card company.
What has been your experience with store-branded credit cards?