Are they a good idea?
You're waiting in line at your favorite department store, and it's finally your turn. You reach into your wallet to take out your credit card, but then the cashier asks you a question: "Would you like to apply for our store credit card? You'll get $10 off today and save 5% on all future purchases!"
Maybe you jump on it, eager for that discount. Or maybe you're not in the mood for paperwork, so you shrug your shoulders and murmur, "Not today." But what's the deal with store cards, really? Would it be a smart choice to fill out that paperwork and add a card to your wallet? It would save you money, right? Well, that's not as guaranteed as it might seem. For most people, store credit cards are not a great choice. Here's why.
1. You may be tempted to spend more.
A funny thing happens as soon as you realize you're holding a card that can get you a discount: you spend more. With the knowledge that you'll save $10 comes the temptation to add $10 more to your cart. Or you might move on to the next store, where you buy extra because you're proud of yourself for saving in the last place. Usually, this results in you spending more than you would have otherwise, which is totally counterintuitive.
2. The rewards are rarely better than those offered by standard, cash-back cards.
Hearing someone tell you, in an upbeat tone, that you'll save 5% on purchases can make you excited to sign up. But if you look over your current credit card benefits, you might find you're earning just as much already. Many cash-back cards offer 2-5% back on certain categories of spending. You could potentially save just as much by using a card you already have rather than signing up for an additional store card.
3. You might not remember to pay.
The more credit cards you have, the more credit cards you have to remember to pay. With the busy lives we live these days, it's so easy to forget to pay a bill. As soon as you forget to pay, late fees start stacking up, and any savings you might have earned from that card have been negated. Not to mention, your credit score takes a hit with each missed payment.
4. Interest rates are often sky-high.
Say you can't pay off your credit card in full one month. If that card is a store card, chances are, you'll be paying a bundle of interest. The interest rates on store credit cards are notoriously high; many are 22% APR or higher. Compare this to standard cards, which often come with an APR between 10 and 15%. If you're going to leave a balance on a card at any point, you really don't want it to be on a store card.
5. Applying might hurt your credit score.
Maybe you're tempted to apply for the card so you can save the $10 on today's purchase, and then never use the card again. This is still not a good idea. Each time you apply for a credit card, your credit score takes a hit. Canceling the card later is not good for your score, either. Your credit score impacts everything from your car insurance costs to what landlords will rent to you, so you need to take it seriously.
The next time a cashier asks if you would like to open a store card, the best answer is a confident "No." The rewards may sound promising, but the drawbacks of these cards far outweigh any benefits.
Equal Housing Lender