EDITOR’S NOTE: The following is a guest post by Kevin Fleming. Kevin runs CreditShout, a personal finance blog dedicated to educating people on how to manage their finances and reviewing the best credit cards.
Almost everyone has experienced it… you go up to the register in a department store or a big box warehouse store, and when you begin to checkout the cashier asks you if you’d like to consider opening up a store credit card. Often, this offer comes with the promise of attractive benefits for doing so- usually in the form of a percentage off of your purchase (10 percent off is common, but the percentage will sometimes go up to 15 percent). Saving money on your items always sounds attractive, especially if you are buying a lot. However, is it a wise idea to open a store credit card? The answer to this, unfortunately, is that it is almost never a good idea.
The Dangers of Store Credit Cards
Store credit cards generally offer very limited benefits to customers. While you may get 10 percent off of your initial purchase, and you also may get special coupons or free shipping deals, these rewards often do not come close to outweighing the costs.
The downside to store credit cards begins immediately upon submitting your application. When you agree to apply at the register, you need to give your social security number for a credit check. The same is true if you apply for a store credit card online, via mail or using any other means. This is so the store can do a credit check to determine your credit worthiness. This inquiry shows up on your credit report, and too many inquiries can hurt your score (the number of inquiries you have listed makes up 10 percent of your FICO score total.) So, even if you aren’t approved for the card, you get a ding in your credit.
If you are approved, the card will lower the average age of your account history. This makes up another 15 percent of your score. Having the credit available on the card won’t necessarily positively affect your “Types of Credit” component of your score either, since lenders look only for the amount of major credit cards you have, not for the amount of store cards.
The card also carries with it another host of problems. Some store cards have an annual fee, which means they charge you just for the privilege of being a card holder. Even cards that don’t offer an annual fee normally have very high interest rates. Macy’s for example, charges a whopping 24.50 percent APR, while many other retailers charge over 20 percent. While consumer average rates for credit cards hovers around 16 percent as of February 2010, its easy to see that these store credit cards are an especially poor deal for those carrying a balance.
Other popular store cards are no better than Macy’s. The Target Credit Card, for example, charges you 23.34 percent APR for their “red card.” There’s no annual fee for the card, but your rewards are limited. Depending on which card you opt for, you will get a “10 percent off day” on: the day you apply; when you reach 1000 Red Points for shopping at target; and when you charge a prescription at target. One percent of your purchases are also donated to an eligible K-12 school of your choosing.
Best Buy offers two cards: a Best Buy Credit Card and a Best Buy Rewards Zone MasterCard. While their standard card offers you no interest for six months on eligible purchases over $299 and a reduced interest rate of 11.9 percent for 48 months on purchases over $299, their standard interest rate is between 24.24 percent and 20.99 percent depending on when you opened the card.
The Victoria’s Secret Credit Card is another with an extremely high interest rate. They tout the special offers and coupons available to make the card attractive to individuals. The rewards include a $10 reward for every 250 points earned, 6 months offers when you first become an Angel Card Member, a surprise birthday gift and exclusive access to sales. However, the APR on this card begins at 22.8 percent as well.
Even if you don’t carry a balance- and you never should, regardless of what type of card you have- store credit cards do not offer you the types of rewards that a standard card will offer.
While most standard cards offer some type of rewards program, from cash back to miles, stores generally don’t and if they do you are still limited to using the card at that store.
Should You Get a Store Card
Generally, getting a store card is a poor idea due to the high interest rates and the limited rewards. Many major credit cards will offer you rewards for shopping in certain categories, and some will even reward you for shopping with the same merchants that offer their own store cards. For example, Citicards allows you to earn an additional 5 percent when you shop online from certain merchants using your Citicard- including Target and Macy’s. Discover and American Express have similar merchant rewards programs. Instead of getting a store card, get a general purpose rewards card and look for these special offers when doing your shopping.
A store card, however, may be a good way for people to build or rebuild credit if they can’t qualify for a traditional credit card. Because of the less attractive terms associated with store cards, they often will extend credit to people that the more standard credit card companies would not.
[...] borrower’s next paycheck. When I say high interest, I mean really high interest. They make store cards with 30% interest look cheap! It’s not uncommon to pay over 300% in interest for a payday [...]