Three Reasons to Avoid Store Cards

by Ryan Yates

How many times has this happened to you? You go to large department store and pick out your favorite (insert favorite thing here). You take it to the clerk to check out. She scans it, hits the total button and here pops out a little piece of paper that says if you apply for their store credit card, you can get 20% off of today’s purchase. This is gonna be a pretty big purchases, so that 20% represents a substantial amount of savings. It would be silly not to sign up, right?

Wrong! Here’s why:

It’s a Card from a Bad Section of Town

If there were such a thing as a credit card from the wrong side of the tracks, store credit cards would be just that. While they are marketed as a card for the store’s best customers, they’re far from it. If you happen to know anything about credit cards, what does a low limit, high interest rate credit card sound like? If you said “subprime,” you got it right. It doesn’t matter if you have perfect credit. They know that if you’re willing to sign up for a credit card standing at a register without reading the fine print, they might as well treat you like you’re subprime.

That 20% Discount Will Cost a lot more than 20%

You already realize all of this, but you have a perfect plan: You’re going to open the card just long enough to get your 20% discount and then pay it off and close it. Let’s use some common sense: If that plan actually worked, the chains couldn’t afford to offer the cards. Statistics show that once the card is opened, even the best-laid plans often break down. Plus, there are other ways you’ll be hurt with this strategy.

Any time there are inquiries on your credit report, it damages your credit and store credit inquiries are the most damaging. That inquiry alone has the potential to lower your credit score for up to 12 months. What happens if you try out your master plan at more than one retail store? Your credit score could be lowered substantially, and all those inquiries will hang around for a full year.

What Will Happen in 12 Months?

Of course the effect of these inquiries will fade over time but what could happen in the course 12 months? Knock on Murphy’s door and he will come out to play, so banking on the idea that nothing unexpected will happen is a dangerous proposition.

What if you find yourself in a car accident and have to purchase a new car? What if mortgage rates continue to drop and you want to refinance before they go back up? What happens if you lose your job and have to apply at a potential employer that runs credit checks? What happens if your auto insurer checks your credit? And these are just the unexpected events that could happen to you. What about others in your family?

Any of these issues could require your credit to be checked unexpectedly.

The Bottom Line

Don’t fall for the 20% discount line. It may look good on the surface but in the end, it will end up costing you. Banks and retailers are not charities, so they don’t give money away for free.  In fact, they probably know you better than you know yourself. The retail store is expecting that you won’t pay it off and they can start piling on the interest. If that isn’t enough, your credit will most likely suffer. So do yourself a favor and keep a low apr credit card on hand for your holiday purchases, pay it off as soon as humanly possible, and beware of retailers bearing gifts.

Tim Chen is founder and CEO of NerdWallet.com, a website that helps consumers to find the best rewards credit cards.  Tim also educates consumers about credit cards and debt management at the Forbes Moneybuilder Blog, the Huffington Post, and the Christian Science Monitor.

{ 4 comments }

Kevin @ CreditShout December 9, 2010 at

Completely agree here – for the most part store credit cards are going to cost you more than that initial discount. A much smarter way to save is through a cash back card, or shopping through one of the online shopping portals offered by American Express, Chase and Discover where they offer up to a 20% discount with select merchants.

Jacob @ My Personal Finance Journey December 11, 2010 at

I definitely agree that store credit cards should be avoided, for the most part. This is true especially since they do not offer the cash back or other perks of regular credit cards.

What are your thoughts of opening up a store credit card if they are offering $50 for signing up? Then, just leaving it in a drawer at your house and not using it again?

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