Do You Really Need that Store Credit Card?
Saving on a purchase today may bloat your monthly balance and dent your credit score
When you belly up to the register at a major retailer, there’s a good chance you’ll hear the clerk ask, “Would you like to save 10 percent (or even 20 percent) on your purchase today?”
To get it you’ll need to sign up (and qualify) for a store credit card. Twenty dollars off that $100 cashmere sweater for your daughter is nothing to sneeze at (unless she’s allergic to cashmere). But here are four reasons you should think hard before saying yes.
High interest rates
Most store cards have an APR (annual percentage rate) of 20 percent or higher, compared to 15 percent for other credit cards, according to a recent survey by CreditCards.com, a website where you can compare and apply for cards. Indeed, the average APR of cards issued by America’s largest retailers is a lofty 24.56 percent.
Run up a balance on a card with a rate that high and you’ll be suffering for years. Let’s say, for example, that you can pay $25 a month toward a $1,000 balance on a typical store credit card. Even if you charge nothing else to that card, it will take you 85 months — more than seven years — to erase your balance. Moreover, you’ll pay $1,107 in interest. If you get into the same jam with the typical all-purpose credit card, you’ll take only 56 months to pay it off and spend just $395 in interest.
If you pay off your balance in full each month, keep reading; there are other reasons to reconsider these cards.
Low credit limits
Initial credit limits on store cards are low, typically just a few hundred dollars. That makes it easy to use up a high percentage of your max — and that can hurt your credit score. How much you owe against your credit limit accounts for 30 percent of your FICO score, which is the most widely used measure of creditworthiness.
A dip in your credit score may cause other card issuers to raise your interest rates or cut your credit limits.
Unintended credit score consequences
There are other ways getting store credit cards can cause your credit score to drop temporarily, which could hurt you if you’re in the market for a car loan or mortgage. You may get a loan but miss the credit score cut-off necessary to qualify for the best rate.
When you get a new credit card, the average length of time you’ve maintained all of your credit accounts declines. The length of your credit history accounts for 15 percent of your FICO score. If you’re a young adult who has had a credit card or two for only a short time, this warning applies especially to you.
You can also ding your credit score if you add many new credit cards to your wallet in a brief period. So it’s a bad idea to apply for credit cards at every store you shop at, no matter how alluring their discount offers.
Ongoing temptation to spend
You may not usually shop at the store where you bought the cashmere sweater, but once you have a store credit card, that retailer may work hard to convert you into a regular customer. About one in three merchants will try to entice their card holders to keep spending with gift cards or certificates, credit card statement credits or discount coupons for future purchases.
Some retailers even offer rewards programs for frequent shoppers that include exclusive holiday shopping nights with cocktails and hors d’oeuvres. If you already find it tough to temper your spending, imagine how hard it will be after you’ve had a glass or two of bubbly.
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