How good of a deal is a store credit card?
You’re at the checkout at your favorite retail store, when suddenly you’re offered a 10 percent or 15 percent discount on what you’re buying in exchange for opening a store credit card. Sound familiar? If this has ever happened to you, then you might’ve been tempted by all the advantages the store will make it sound like the card will bring, such as promotions, discounts, as well as other perks.
While it may sound tempting, don’t be swayed. Yes, there can be many advantages of having a store card, but many times, there can be just as many drawbacks, too. Consider the following cons before signing up for a retail credit card:
1. Low limits
More often than not, retail credit cards start you out with a low credit limit (especially if your credit is poor). And if your limit is only $100 to $1,000, the purchases you make could easily put you at a higher credit utilization (your purchasing power amount) than what’s beneficial for your credit. So for example, if you have a credit utilization of more than 20 percent, a credit card with a $100 limit means you shouldn’t buy more than $20 worth of items — and that’s not very useful.
2. High interest rates
With rates usually around 20 to 30 percent, if you’re likely to revolve balances, it can become extremely pricey if you don’t pay off what you owe at the end of your grace period. In fact, in some cases, people end up paying double or more of their initial purchase. So even with that discount offered at the beginning of use, it still isn’t worth it financially.
“The key, as with any credit card, is to pay it off each month, so that interest rate is moot,” says Matt Schulz, senior industry analyst of CreditCards.com.
3. Negative credit score impact
This is especially true if you sign up for multiple retail cards.
“You’re going to see more than a 30 point ding if you start getting multiple cards,” says Andy Jolls, CEO of the credit educational site VideoCreditScore.com. And closing recently opened accounts won’t necessarily make them disappear.
“That account will stay on your credit report for seven years. It doesn’t instantly go away when you close it,” explains Emily Peters, credit expert for Credit.com. In addition, applying for a new card also lowers the average age of your accounts, which can have an impact on your credit history’s length.
4. Spending temptation
“Once you sign up for a store card, you give the store free reign to bombard you with enticing ads and shopping promotions,” says Fatima Mehdikarimi, founder of ShoppingQueen.com. So if you’re mulling over signing up for a retail card, consider your shopping habits. If you acquire a store coupon, do you typically have the urge to use it, even if it’s on something you might not have necessarily bought without it? If so, you’re probably better off not signing up. It’s also important to keep in mind that “many of these promotions and sales can simply be had by signing up for the store’s e-mail newsletter,” according to Mehdikarimi.
5. The terms aren’t spelled out up front
Usually, salespeople will offer you the credit card when you’re making a purchase, and that doesn’t give you a lot of time to think or go over a full explanation of the terms and conditions before you decide.
“Anytime that you’re making a decision without taking the time to read through the contracts and terms of service, it’s not (a good idea),” says Schulz. “It’s always best when you’re offered one of these cards to take a step back and think about it.” So walk away to give it a second thought before jumping into any rash decisions.
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