As you start to wrap up your holiday shopping, be careful when it comes to store credit cards. More often than not, you’ll be asked if you want to sign up for a store credit card and immediately save money on your purchase. While spending less during the holiday shopping season is always beneficial, applying for a store credit card may not always be good for you.
That being said, credit cards issued by stores can provide some benefits. For instance, most don’t have annual fees, nor require high FICO credit scores to qualify. Teenagers, college students and young adults may find these cards helpful when it comes to building credit, provided they can pay their monthly bill in full. A good rule of thumb would be to only use these cards for a few purchases a month and to keep the statement’s balance below 10 percent of the credit limit.
These credit cards are also good for in-store discounts. Shoppers can save hundreds of dollars throughout the calendar year if their favorite retailer offers a 5 percent discount on all purchases made with the card. Again, however, shoppers need to be self-disciplined when using the card.
While there are benefits to store credit cards, there are some areas that make them very dangerous that can become even more harmful to individuals.
The Impact On Your Credit
Although you don’t need a high credit score to sign up for a store credit card, the actual credit check can potentially have negative consequences. When you apply, your credit report will be hit with a hard credit inquiry. Generally speaking, one hard credit check will not signal the end of the world, although it will remain on your credit report for two years. For others, however, a hard credit check can knock off as much as five points from a credit score.
If you get into the habit of signing up for store credit cards, the hard checks will start to result in negative consequences by substantially decreasing your credit score. Individuals and families on the verge of big life decisions, such as buying a car or obtaining a mortgage are most at risk.
Five points may not seem like a lot in passing, but for mortgage lenders, those five points can be the difference between two interest rate ranges. Potential homeowners who signed up for too many store credit cards may therefore end up paying thousands of more dollars over the course of their mortgage.
Rates Are High, Credit Limits Are Not
Store credit cards typically carry low credit limits, which can negatively impact shoppers if they have a high balance after failing to pay off their monthly bill in full. This then triggers a decrease in your credit score, which can cause other card issuers to raise interest rates.
Likewise, store cards are notorious for having high interest rates, perhaps one of the biggest drawbacks for signing up for them. Most cards have annual percentage rates of 20 percent or more. These rates are not adjusted for risk either, meaning even if you have an outstanding credit score, your card will still carry the same APR as someone who has a poor financial history.
On the other hand, some stores advertise their cards as having 0 percent APR for a certain number of months and will typically offer these deals when purchasing big-ticket items, such as televisions and home appliances. Be very careful when thinking about this deal because it may not be truly representative of what you’re signing up for.
“Store cards are notorious for having high interest rates.”
For example, the 0 percent interest may actually turn out to be a deferred-interest plan. If you do not pay off your balance during the promotional period, you’ll then be charged the entire interest accrued effective to the purchase date.
It’s also worth checking out the interest rate once the promotional period is over. More often than not, the APR will spike after six or 12 months.
Store credit cards are designed to really only be used at the retailer. Unlike some of the leading credit card providers and banks have built a network complete with attractive rewards for individuals who use their credit cards on a consistent basis. They may even have limited promotions when the card earns double rewards when purchasing gas or airline tickets.
Some people make all their purchases on credit, paying monthly the balance in full and reap the rewards by their credit card. A good rule of thumb to follow is to earn at least 2 percent cash back on purchases. Store credit cards, in comparison, are often limited in where how they can be used and offer very little rewards when used elsewhere, if at all.
Store credit cards can definitely be appealing when the cashier asks if you’d like to save money on the purchase. You may think you’re getting a good deal and agree to sign up without conducting thorough research. Just know that owning a store credit card is not necessarily bad when used sporadically. If you need a card for major purchases and need to carry a balance from month to month, the high interest rates on a store card may act as a big shock.
In this case, this type of credit can damage an individual’s credit score and possibly cost them more money in the long-term.