“Would you like to save 10 percent on your purchase today and everyday forward? It’s easy! You just have to sign up for our store-based credit card. You don’t even have to pay today!”
It’s a familiar chorus heard throughout department and big box stores across the country. The offer to enroll in a credit card for a guaranteed discount for all future purchases can sound incredibly enticing, particularly to customers who don’t fully understand credit card usage and its effects.
While it’s not a horrid idea outright to sign up for these types of credit cards, there are some questions you should ask before filling out an application.
No. 1: Applying For A Card Will Come In As A “Hard Inquiry” On Your Credit Report
When you look into opening a new line of credit (and applying for a store credit card is just that: a line of credit), your credit history will be examined in order to determine if the store’s institutional lender is willing to take you on as a new customer.
Even if they deny you, your credit report will reflect that inquiry.
One further note, that inquiry can influence your credit score and drop it down a few pegs, regardless of if you end up opening that line of credit.
Before you open a new line of credit, check your credit score for free.
No. 2: Store Credit Cards Often Come With High Interest Rates
While your rate will vary depending on the store’s offerings, it will also vary significantly based on your credit.
Store cards frequently come attached with sky-high APRs, often 20 percent or higher.
What that means for you is that if you don’t pay off your bills quickly (if you revolve the balance on your card), the high interest rate will quickly decimate that 10 percent discount you received at the checkout counter.
No. 3: The Credit Limits On Store Cards Are Often Quite Low
On the face of it, having a low credit limit doesn’t sound that bad. You will just be less tempted to overspend, right?
However, in order to maintain a healthy credit score or boost that number, personal financial advisors recommend keeping the statement balance at or below 30 percent of the credit limit.
If your limit is $200, all of a sudden, you are looking at a “true” usage amount of just $60.
No. 4: That Initial Ding On Your Credit Report Can Haunt You Down The Road
If you assume the application inquiry can lower your credit by 30 points, look at the larger picture and really consider the implications of possibly winding your score from borderline excellent (around 755) to the “next best” level.
Consumer advocate and credit educator Katie Bushor warned, “Weigh the annual savings you’ll receive from 10% off your favorite store against the $50 higher-than-it-would-have-been monthly mortgage payment you’ll have next year. You’ll be paying off that mortgage for the next 30 years. Do you really want to spend an unnecessary extra $50 every month just to have a $100 annual savings on department store clothing?”
Do you understand how credit works? Quizzle can teach you how to build credit using credit cards!
No. 5: Holding Plastic Holds Temptation
There’s a tendency to spend more when a discount is promised. It’s important to keep in mind that the discount percentage is not a free ticket to purchase 10 percent more every visit.
Particularly for people who have a habit of overspending, store cards can lead to substantial debt if not carefully monitored.
The bottom line? Bushor says, “It depends. If you think that over the next year you’ll be applying for a larger loan, it may not be worth it. If you have a tendency to overspend, it may not be worth it. If you are opening the card to boost your score, but don’t have the proper discipline, it may not be worth it.”
“On the other hand,” she continued, “if you always pay off your bills regularly, completely and immediately and take advantage of doubling up on savings by using store sales or manufacturer coupons in addition to your card discount, it might be beneficial to open that card.”