You’ve just spent an hour looking at clothes, trying them on, and choosing the perfect ones. You put them on the counter to pay for them. The salesperson informs you that you can save 20% on your entire purchase today if you open a store credit card. It might sound tempting when you’re looking at a hefty amount you’re about to spend. But are store credit cards ever a smart choice?
Store Credit Cards Save Money in the Moment
If you are making a large, one-time purchase at a store that offers a discount by opening a card, you might consider it a smart move. However, don’t get trapped by high interest rates. Make sure you can pay off the balance immediately, even before the bill arrives. In other words, don’t think of store cards as a way to buy something you cannot afford.
If you truly need to buy something right now but don’t have the cash to cover it, choose a different means. Use a low-interest, regular credit card if you have one. Borrow the money from a friend, if that’s an option, and you’re sure you can pay them back quickly. But using a store card in this situation can get you in trouble. We’ll tell you how in the next section.
Watch Out for High Interest Rates
Store cards typically come with sky high interest rates. A 2018 study found that, “Retail store credit cards’ average interest rate is nearly five percentage points higher than general purpose cards, and many store-only cards have APRs near 30 percent…” Yikes.
That means, if you don’t pay off the balance immediately, you can wind up paying a lot more, negating that up-front discount. Some will entice you with a no-interest period of, say, three or six months. Don’t fall for it! If you take longer than that to pay the full amount, you could wind up paying interest on the full purchase, not just the amount remaining at the end of the so-called no interest period. You could also violate the terms of that period if you make a payment late.
Speaking of late payments, these cards typically incur high penalties if you make a payment late. One misstep could negatively impact your credit score, plus cost you a bundle in fees or even higher interest rates.
Store Cards and Your Credit Score
One reason to open a store credit card could be to build your credit. If you’re just out of high school or college, or otherwise lack credit history, start to establish one as soon as you can. Try applying for a major credit card through your bank or credit union. If you get rejected however, you might apply for a store card. These are typically easier to get.
Store cards tend to start with lower spending limits than other credit cards. There’s an upside and a downside to this difference. If you struggle with spending discipline, the lower limit can keep you in check. However, your credit score looks at what percentage of your overall available credit you’re using. So carrying even a small balance on a store card can represent a big percentage of your available credit.
Whether you decide to open a store credit card or any other credit vehicle, read the fine print. Take time to understand the terms and costs. Finally, always make a budget and stick to it. That will help you spend within your means and keep any credit card balances from growing beyond your control.