The Skinny on Store Credit Cards
As popular and easy to use as credit cards are, it may be tempting to add your favorite store’s credit card to your collection. It’s especially tempting when you are making a large purchase and hear that you could save 10% on that purchase if you sign up for a new store credit card. Not only could you save money immediately, but you may also receive advance notice of upcoming sales, additional discounts, or earn other rewards. While it may sound like a great deal, you may just want to pass on that credit card application. Getting a store credit card might not be in your best interest in the long term.
Why shouldn’t you take advantage of such a great offer? Clearly, many consumers have and use store credit cards. Besides, you probably already have and use at least one credit card already, so what’s the big deal? The big deal often comes in the fine print.
Store credit cards are usually offered by major retailers to their customers through either their own financing arm or through a third-party issuer. They usually carry a very high interest rate well above what you may have on your regular credit card. The interest rate on many store credit cards is more than seven points higher than the average major credit card offers. If you end up carrying a balance on your credit card, you will end up paying a substantial sum in interest. This will soon far outweigh any discounts or special offers that you receive from the store for signing up for this card.
In addition, these credit cards usually carry higher minimum monthly payments than bank credit cards. While that means that balances get paid off more quickly, it may put you in a temporary bind at the end of the month if you haven’t factored that minimum payment into your budget.
The most obvious concern with signing up for any new credit card is the temptation to use it to increase your spending limit and thereby end up with more debt. Even with a higher than average minimum payment on the card, you may still fall victim to the temptation to carry a balance. Alternately, you may decide to pay off the store card but end up carrying a balance on one of your other cards. Either way, the more purchases you make with credit, the greater the risk that you will fall into credit card debt.
Another issue to consider if you are thinking about applying for a store credit card is the possible affect the card can have on your credit score. When credit bureaus calculate your credit score, the formulas they use with store credit cards are different from those they use with bank issued credit cards. Additional store credit cards tend to make you look like a bigger credit risk to these agencies, which results in a lower credit score. Your credit score ultimately affects the interest rates you pay for other borrowing, so a lower credit score could have a negative impact on any future credit or loans that you apply for.
While it is wise to have a variety of kinds of credit in your credit history, too many lines of open credit can also send a danger signal to potential lenders. They may worry about your potential to incur more debt than you can handle. Even if you only apply for the store credit card in order to benefit from the initial savings, the open account will appear as revolving credit on your credit report.
There is one more issue to consider when applying for store credit cards. Many stores including giants like Wal-Mart routinely provide your data to third parties interested in offering you special promotions or services. You may not want to have your personal information shared with these other companies. You may also find yourself added to still more mailing lists. This increase in the junk mail you receive may not be one of the benefits that you thought you were signing up for!