Use caution when signing up for retail store credit cards
Retail store credit card offers can be extremely tempting. Store personnel will tell you about major discounts, promotions and other perks that come with signing up for their cards. But before you jump at the next offer, consider these do’s and don’ts.
Do
- evaluate the benefits carefully
- get the perks without the card
- beware high interest rates
- check for two-cycle interest
- understand the impact on credit scores
Don't
- succumb to pressure
- neglect other rewards card programs
- carry balances
- look to a store card as your only means to build credit
- apply for a store card before applying for a loan
Do evaluate the benefits carefully
Look past the discount on immediate purchases to determine if a store card’s benefits are worth it to you. For example, if a retailer offers free shipping with the card, and you order enough times throughout a year that you know you’ll use and benefit from that, it could be worthwhile. Be honest in your evaluation.
Do get the perks without the card
Ask if the store offers a mailing list or email list option. Sometimes, consumers can receive the same benefits a card offers by receiving the email or snail-mail info.
Do beware high interest rates
Store cards often carry very high interest rates. If you do not repay the balance in full, the interest charges could equal or outweigh the savings at the cash register.
Do check for two-cycle interest
Under the Credit Card Accountability Responsibility and Disclosure Act of 2009 lenders cannot use two-cycle interest calculations – that is, charging interest on the average balance for each of the past two months. However, the restriction only applies to cards with grace periods – those that begin charging interest only after a contractually agreed time, vs. from the time a purchase is made. Some retailers have eliminated the grace period on their store cards completely, enabling them to still use what amounts to a two-cycle billing period. Review the fine print for info on grace periods very carefully.
Do understand the impact on credit scores
Store cards are sometimes are issued by finance companies, which can, in some cases, have a negative effect on credit scores. Most people are better off paying in cash or using a regular credit card when they shop.
Do not succumb to pressure
When you’re ready to pay for your purchase and the clerk is listing the benefits of getting a store card, it can be hard to decline. Realize what is going on, be prepared and hold your ground.
Do not neglect other rewards card programs
Whether you’re after rewards points, discounts or other perks, compare the benefits of a store card with those of other rewards card programs. You may find the best deal with a regular credit card, and perhaps even with your current credit card issuer.
Do not carry balances
Ever. Charge only what you can pay off in full each month. In other words, learn to line within your means.
Do not look to a store card as your only means to build credit
While these issuers are generally more likely to approve people with lower credit scores, the costs of having the card can be high. Instead, build credit by paying every bill – including utility, phone, rent – on time, all the time. Consider use of a secured credit card if need be. With this card, the borrower must make a deposit, and credit card charges are applied against the deposit. Confirm that your spending and payments will be reported to the credit bureaus.
Do not apply for a store card before applying for a loan
Every time you apply for credit, your credit score dips. While it may be slight, and temporary, it can make a difference when you go to apply for a loan to purchase a car, home or other major item.
Summary
A retail store credit card can be the right decision for some people. Typically, though, they will cost you far more than you save in the long run. Think carefully before making your decision.
