Store Credit Cards Are An Even Worse Deal Than You Thought

Next time a checkout clerk offers you an “opportunity” to sign up for a store credit card so that you can get an instant 10% discount on that pack of gum or box of tissues you’re buying, remember this: the price you’ll pay for that deal is an interest rate as high as 25%. And, yeah, you’re telling yourself that’s no big deal, since you’ll pay it off every month. But will you? And are you prepared for the other gotchas tied up in a bright ribbon by your friendly retailer?

Forbes points out that “the terms on these cards tend to resemble those offered to subprime borrowers, with interest rates as high as 25%.” Common wisdom has long been that store cards are a good way for young consumers to build a credit history. But they’re not even the best option for that limited purpose. According to Forbes, store cards can often hurt your credit rating:

You could also face taking a hit to your credit score if you get lured in by too many of these offers. Opening up new credit cards solely for the upfront bonuses can hurt your credit score in a few different ways:

  • Since the cards have such low credit limits, and you’re making a big-ticket purchase to take advantage of the deals, your credit utilization ratio will go up
  • Opening new accounts will reduce the average life of your credit accounts
  • Opening new accounts also adds “recent credit inquiries” to your file, which will affect your score for the next year

Some examples of not-very-good deals include the Target Red card, which offers customers a 5% discount, and carries a 22.9% interest rate. Want 5% off at Target? Forbes suggests using a Chase card at the bank’s Ultimate Rewards Mall, where you can get a discount on purchases from Target.com and other retailers.

Are Store Credit Cards Worth It? – MoneyBuilder – making sense of your finances [Forbes]

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  1. obits3 says:

    Or you could pay off the card in full every month and get the 10% off…

    • Julia789 says:

      I work next door to a Macy’s – my office building is next door. On my lunch hour I often browse there and purchase a few things the family needs (school clothes for the kid, a new pot or pan for the kitchen, new shoes for hubby, pantyhose for me) and I always get Christmas gifts there – so convenient. Over the last 10 years I must have spent $10,000.

      They recognize me and always try to get me the store card offer. I keep turning it down. They say it has rewards points and you get extra discounts on sale prices. I shop there enough already, the card would just tempt me to over-spend! Plus if I couldn’t make the payment, say, after Christmas when the bill is larger than usual, I’m stuck with a huge interest rate.

      Too much hassle for an extra 10% of on 4 big sales a year.

      • George4478 says:

        You recognize the card would cause you problems, you stay away from it, and you do what works for you. Kudos!

        (I mean that sincerely. Too many people don’t recognize their ‘problem areas’ and get themselves into trouble.)

        • MamaBug says:

          i refuse to open any more credit cards (or let my husband, as i am the CFO of the household). We have had a problem paying off the balance in full in the past (due to cut hours and economy and such, having to use the cards for groceries and the like) and until we pay off balances in full for 12 consecutive months i refuse to even think about opening any credit lines.

      • Kate says:

        I’m pretty much the same, work next to a Macys, browse there a lot. I have a card and have used it occasionally for sale discounts (I always pay all my credit cards off each month) but I hate Macys credit contractors and don’t do it very often. They always seem to mess up something and I end up spending an hour on the phone with the gang in India trying to get it resolved.

      • rhobite says:

        It’s great that you’re using self control, but that Macy’s card would probably have saved you a fortune over the years. They send you 20% off coupons all the time, plus you get “use your card” savings during sales. At your spending level you also get free gift wrapping and some other random benefits. Macy’s is one place it pays to use the store card.

    • humphrmi says:

      The OP dismisses this very important point with the one sentence “But will you?”, as if that statement alone settles the point.

      People who carry balances probably will keep carrying balances, and people who pay off every month will likely keep doing so. Various credit cards are good and/or bad for you depending on your situation. Your mileage may vary. Void in Alaska. Not valid with any other offers.

      • Bohemian says:

        Or you get hit by a truck and miss the due date on all those card payments. Things happen. People are setting themselves up for a big potential risk if something goes haywire in your life.

        • huadpe says:

          That doesn’t differentiate a store card from any other CC. The article was about why a store card might be worse than other credit cards.

    • Red Cat Linux says:

      I tried that with a store card. This was back long before the easy convenience of web-banking. I had to use the store card, leave the register and march back to Customer Service and pay the bill before I even left the store. A pain in the butt.

      Nowadays, I pay, go home, use web banking to immediately pay off the card, thumb my nose at the store card, and go my merry way.

    • mythago says:

      That doesn’t do much for points 2 and 3.

    • jesirose says:

      My BF got a Gap card because they offered a huge amount off on a big purchase. We found out the only way to pay it was online. He usually pays cash for things, or uses store cards, and so once a month we drive around to all the stores and pay the cards off in cash. Gap doesn’t let you do this, so it turned into this huge thing to get the bill paid – it ended up not being paid on time because of that.

      Yes, he should have asked before getting it, but it seems reasonable a store card could be paid…in that store.

  2. PLATTWORX says:

    True, if you are not a saavy consumer and don’t pay attention store cards can be a trap. However, if you are smart and keep track of your finances properly you can enjoy discounts and promotional financing only for card holders of said store those without a card won’t receive.

    The money I have saved with special discounts and interest free financing of large purchases (while not having to outlay my own cash up front) has saved me hundreds, as I am sure others have done the same.

    If you don’t pay attention to your limit, you don’t pay the minimum each month or pay off a balance before a promotional period ends, yes…. you get charged a small fortune. That is why you need to keep your eye on the ball.

    • apd09 says:

      not only has it saved you money, but it also potentially made you money. if you bought something for 2,000 on interest free no payments for 12 months then put 2,000 into savings at 2% interest you may only make 40 bucks on it over 1 year but you still made 40 bucks along with saving 500 in interest if the rate was 25% on the card. So over 12 months you had a net gain of 540 dollars.

      • georgi55 says:

        Not really as you probably would not have put it on the card if the card did not give you 0% interest. You can’t add something you’d save and something that you would not have spent anyway to calculate savings.

        • Verdant Pine Trees says:

          The way I see it, you either would have spent the money in cash, all at once, or you could put it away in savings, and earn a little interest, then pay it off in cash at the end of the 12 months.

          Of course, when we do these deals, we don’t necessarily have $2000 to play with. We pay off incrementally and ahead towards the amount we charged: for instance, $150 a month towards a 18 month, $2000 bill for flooring. We pay it off ahead, and we do end up saving on the interest if we’d charged it or had to borrow a credit union loan to pay for it.

    • Nigerian prince looking for business partner says:

      I do the same thing on big purchases. 0% financing for 12 months is a bargain.

  3. TouchMyMonkey says:

    Oh, and get this. I got one of those notices from Citibank that my Sears card’s terms are being changed. Now they wanted to base interest charges on “average daily balance, including current purchases.” In other words, no more 20-day grace period, the usual usurious interest rate Sears cards usually carry apply from day one. That, and some “why would I ever do this anyway” balance transfer fees also went up. Needless to say, I called the 877 number and opted-out.

    It’s nice to have a zero balance.

  4. Alvis says:

    What’s with all the posts with no author?

    • Michaela says:

      Maybe it is Phil hiding.

    • TasteyCat says:

      Somebody suggests in a recent article that the garbage articles get no author to hide the shame, although this is a reasonably article (albeit misleading in its suggestion that it’s not a good way to build credit).

  5. apd09 says:

    The only store card that I use is my home depot one when I get 12 months interest and payments free. Pay that sucker off over the course of a year and big ticket items are no problem. Our first year in the house we bought new appliances and paid it off in 12 months, during year 2 we bought a new heat pump system and next month is when the interest rates kicks in so i will transfer the money out of savings where we made interest and then pay off the card.

    If we didn’t pay it off, yeah around 24% interest, but 12 months interest free and no payments is a pretty good deal for fixing things around your house.

    • Nigerian prince looking for business partner says:

      I do the same thing with my Lowes card. They’re constantly running 12 months no interest promotions.

      • PLATTWORX says:

        Same here. I use Lowe’s & Home Depot 12 month no interest offers to buy supplies for large projects and sometimes they even give 10% off in addition.

        All I do is split the balance into 10 or 11 equal payments and set it up in my online bill pay to kick out that amount each month on the same date. That insures I never miss a payment in error and I am all paid off before the promotional period ends.

    • georgi55 says:

      They don’t have no payments promotions anymore – in fact no one has them as they were outlawed by CARD act. Pretty stupid part of CARD act IMO, if you were signing up for 0% interest no payment, most people would pay it off before end of promotion anyway, why ban no payments???

  6. MaelstromRider says:

    And also watch out for stores trying to trick you into applying for a credit card. I was checking out at Lane Bryant and the checker asked me if I wanted to sign up for their rewards card. Thinking it was along the same lines as Best Buy, Toys R Us and grocery stores, I asked if there was a cost, she said ‘no,’ and I agreed. I give her my name, address, phone, email, and they she asked for my SSN. When I balked, she admitted that I was actually applying for a credit card.

    While I would have liked to just walk out and not purchase anything at that point, I needed the clothes for an interview the next day so I just canceled the card app. Still, very annoying.

  7. BuffaloGal says:

    I had one of those Target cards. Never used it, and eventually they cancelled it for me. I’m sure my credit took a hit for that. Last night at Kohl’s the sales associate tried to shame me into signing up for one of their cards. Think of the coupons! The savings!
    …but if I buy nothing I am saving more than if I am buying, right?

    • speedwell (propagandist and secular snarkist) says:

      For some reason I’ve been hit on with credit card offers at three stores this week (which is three more than I usually encounter in any other week). It goes something like this:

      “Can I tell you how you can save ten percent–”

      “I don’t use credit cards.”

      “Oh, but–”

      “Is that my total?”

      “…”

    • DanRydell says:

      Yeah, but if you need to buy something you need to buy something, and you might as well spend less, right?

      Kohl’s is one of few stores where it’s worthwhile to get the card, because they give you great discounts every month. Most stores give you the 10% when you sign up, but after that their cards suck. Target’s is pretty good too.

      • scoosdad says:

        I hate to break it to you, but I don’t have a Kohl’s card, never have, and I get those extra discounts sent to me every month too. They must suck your home address out of Visa’s database because that’s the card I use at Kohl’s and I’ve never knowingly given them my personal information.

        • theduckay says:

          I get both the non-card discounts (what you’re referring to) plus the card member discounts (which state that it can only be used by charge card members)…so I basically never go there without a coupon in my hand. Most times, the charge card coupon is for a greater amount than the regular ones they mail out.

    • theduckay says:

      If you do shop regularly at Kohl’s (like I do), I can vouch for the savings that their charge card will give you. They constantly send out 15% off coupons for Kohl’s Charge members…I probably saved a bundle since having one.

    • George4478 says:

      Kohl’s is the only one my wife and I have. We never buy things there without at least a 15% coupon and we have a stack of those.

      Total interest paid over years of Kohl’s cardage: $0.00
      Current interest rate on Kohl’s card: No idea.

    • Kate says:

      Kohls puts the same discounts out in the paper all the time, and they tend to carry the same thing Walmart does, but marked up. so – just shop at Walmart.

      • Dilbitz says:

        Kohls clothes are SO much better than Walmart! They have better bedding and better kitchenwares too! The only thing I see that would be better at Walmart is the electronics and toys. Please do not compare the two….

  8. EverCynicalTHX says:

    Even with the discount I don’t go for store cards, most are underwritten by the worst lenders in the country – those who will do everything possible to screw you over. Just say no!

  9. Bativac says:

    I took out a Best Buy store card for the giant TV I bought recently. It’s zero interest if paid off within 36 months, as long as you make at least the minimum payment on time every month. What I noticed, though, is that the minimum payment is about 1/4 of what you would actually have to pay monthly to have the item paid within the 36 month timeframe.

    Sneaky! But as long as you read everything, they shouldn’t be able to slip anything past you.

  10. heismanpat says:

    Interest rates are irrelevant when the card gets paid off every month, and I take issue with the fact that paying the card off every month is some unobtainable obstacle. I got my first credit card over 5 years ago when I was still in college. I now have about 10 (many of which are these “evil” store-brand credit cards). In that time frame, I’ve had exactly 1 late payment (missed the cutoff for paying it online by an hour), and it was promptly refunded after I called and asked for it to be waived.

    It’s cute that Forbes suggests getting a new Chase card to buy stuff online from some “rewards mall”, but there are a lot of purchases that I don’t care to buy online (groceries, shoes and clothes to name a few). My Target, Kohls, JCPenny, American Eagle and OldNavy cards go a long way in helping with that. I had a 30% off coupon to Kohls a few weeks ago….it’s hard to beat those prices anywhere.

    These credit cards can get a lot of people in trouble, but they can also save you a lot of money if you use them wisely. I have a low interest rate mortgage and no need to finance anything soon, so I couldn’t care less about losing a few points on my credit score. The bigger hassle is keeping track of all of my cards.

    • theduckay says:

      completely agree…and the Kohl’s Charge is amazing when it comes to coupons.

      Question though, is there a penalty of some sort if you go a certain amount of time without using one of those cards? Just curious :)

      • heismanpat says:

        I’ve never seen one that penalized you for *not* using it. In fact, I went almost a year without using my Target Visa because their previous rewards program was not worth it to me, butI was never penalized for carrying a zero-balance. If there is a card like that out there, I wouldn’t use it. I wouldn’t be surprised to see a store sneak it in to one though…the banks are starting to get pretty sneaky with fees.

  11. pecan 3.14159265 says:

    I’ve been considering the Target Red card. I love Target and 5% off each trip is really appealing because we buy a lot of their generic household products there.

    • RyansChestHair says:

      I work at a Target store and if people don’t want to sign up for the card because of the high interest, simply ask the cashier to help you open a Target Check Card. Basically, its a debit card you use only at Target, which debits money directly out of your checking account with your bank. All you need to bring with you is your state issued i.d. and a voided check.

      I have bad credit (student loans) and I signed up for the check card. I got it 2 weeks ago. Its great, and you still get the 5% off each and every purchase.

  12. Bob Lu says:

    Credit utilization ratio and recent credit inquiries have only miner and short term impact on your credit score. If you are building your credit record from zero (like, if you are a foreigner who moved to the states recently), and if you manage your card carefully (use each of them every month, pay in full each month), within two years you can build a pretty nice credit record with the help of store credit cards. As for average life of credit accounts, you actually should get all the cards you may ever need as early as possible.

  13. Hank Scorpio says:

    I use my Sears card for when they have (which is fairly often) one of their “12 months no interest” deals on something we need for the house. We just make damn sure to pay it off before the 12 months is up, otherwise they hit you with back-rated interest for those 12 months.

    We ended up buying all new appliances for the kitchen, and a new mattress a few years ago doing this. All were paid off before the time limit.

  14. M3wThr33 says:

    My father royally screwed up my credit by saying he’d take care of my student loans, then lying up until 2 days before I was sent to collections, spending an entire year not paying and not telling me.

    The Target card is the only one I’ve ever been approved for, slowly building up my credit. It has a whopping $300 limit and a 24% APR, but I’ve paid it off in full every month. It’s all I can do.

  15. Sheila says:

    Has anyone been in a JC Penney recently where clerks ding bells and supervisors announce over the loudspeaker who has signed up customers for the most credit cards that hour? It’s so trashy. I feel like I’m at a used car lot.

  16. Im Just Saying says:

    I’ve had my Best Buy card for years because they offered 90 day SAC on all purchases, but a few months ago I noticed that benefit had disappeared without much fanfare so now it gets no use at all unless I’m buying big ticket items which still carry SAC deals.

    • georgi55 says:

      what’s SAC?

      • squirrel says:

        Same-as-cash.

        BB also was getting complaints because people sending in the last payment would see their last payment “sat on” and not cashed until it was beyond the promotional rate period… then billed for all that back interest.

        I’ve been known to partake in these SAC deals, but I pay off 12 month ones in 10 months just to avoid issues like that.

        My wife did that too, and paid everything off early (she’s working on building credit herself). Then somehow $0.17 was “left over” and two months later she was socked with $200+ back interest and a $40 late payment fee. The customer service rep even looked at it and the payment history and was embarrassed. They also waived all the charges with minimal argument on our end, much to our surprise.

    • riguitargod says:

      I’m pretty sure that was due to the CARD act. I don’t recall the specifics, but I think 6 months might be the shortest promotional period that can be offered. Generally, I find that they have longer periods for lower amounts now because of this. For example recently all you had to spend was $249, and you got 18 months no interest. (Currently it’s $429 though)

  17. TooManyHobbies says:

    I get store cards when they’re offering 20% off or so (Lowes does this) – then I pay the amount in full as soon as the card arrives, and when the zero balance statement arrives, I call and cancel the account.

    I’ve done this several times over the last 10 years. I would NEVER carry a balance on a store card.

  18. Beeker26 says:

    You’ll have to pry my Walmart card out of my cold dead hands.

  19. J_Sch_1104 says:

    Not to shill for Target, but you can sign up for a Target debit card and get the 5% off coming out of your checking account.

  20. dougp26364 says:

    So, the zero percent offers I take on store credit cards are a rip off? I guess I should just take the cash out of the interest bearing account then rather than use the interest free for 6, 12, 18, 24 or even 36 months offered by many of the store cards.

  21. seanism says:

    If you are the type to not pay off your credit card every month then credit cards in general are a bad idea.

    If you are the type to pay it off every month and do it religiously then its fine use it to your advantage.

  22. Bohemian says:

    Target debit red cards are a much better option. They tie the card to your regular debit card or checking account at your bank. Then you swipe and pin that card instead of writing a check or using your bank debit card. You get 5% off everything you buy without the risk of a crazy credit card full of fees. If you fill prescriptions there, every 10 refills gets you a coupon for another 5% off an entire day’s purchases.

  23. Zclyh3 says:

    I use a Best Buy card to buy my camcorder. I even shipped it to a friend’s in Oregon to save $100 on the tax and got a 10% off when Bing cashback was in effect. Once I got my bill, I immediately set 18 equal monthly payments to be paid on the same day every month. I also watch the emails as well to make sure I get one when each month is paid.

    If you’re diligent enough, it can work to your advantage.

  24. sopmodm14 says:

    you still have to pay off the card either which way you put it, but on some store cards, there’s no interest for 6months to a whole year….plus the savings from that single purchase

    interest rates will be similar to bank/store cards anyway (i’m looking at you citibank!)

    if you’re a smart spender, you can win with a store card (if you’er not a smart spender, you’re doomed with any card)

  25. JeremyE77 says:

    Consider instead of the Target RedCard…the Target RedCard Debit card. No chance of paying interest. It works similar to a check (ACH transfer). You save the same 5% (every day) as using the RedCard without that possible interest trap (no fees, no interest, no worries). (take a blank check with you if you intend to apply).

  26. gman863 says:

    5% off Target’s posted price? Hmmm. This makes the average price on groceries about the same as using my Kroger loyalty card. Books? Electronics? Amazon beats the crap out of Target: Lower prices, no checkout line and an instant 8.25% additional discount since there’s no sales tax.

    In Houston, Target’s prices have gone up over the past few years. 5% off is Target’s gimmick to disguise this, much like supermarkets’ loyalty cards and double coupon offers.

  27. duffbeer703 says:

    I propose a moratorium against all blog posts that point out blatantly obvious facts about credit or offer vague warnings about the impact on your credit score.

  28. pot_roast says:

    Even folks I know with “good credit” (700+ FICO) are getting 19.99% on new cards. That’s how the card companies are making money after the “reform act” passed. Everyone is getting higher interest rates.

    And the FICO system of dinging you for inquiries like it does is ridiculous. Being penalized for shopping around for better rates is stupid. I know it claims that auto/home finance related inquiries count as one if they’re within 30 days, yet I was still dinged for “excessive inquiries” after the only inquiries on my report were a refinance and car purchase. Technically TWO inquiries is now “excessive?” Dumb system.

    • gman863 says:

      Before opening an account or accepting a “pre-approved” offer with a temporary low teaser rate, shop around. There are still many cards out there with interest rates under 10%.

      * Credit union card rates can vary widely. If you have a 700+ FICO and they’re hitting you with double digit rates, call a few other CUs in the area for their card rates.

      * I have a card through BBVA Compass Bank that’s 7.24 (variable only if the prime rate goes up). BBVA Compass (like many other card issuers) card application states your rate will be set at between 7.24% and 19.24% depending on your credit. Pay a few bucks to get your FICO score before applying for a card with a rate that “depends on” your score. Before submitting the application, tell the banker “My FICO score is currently 7xx. Based on verifying this, will I get the lowest rate? They should know or be able to quickly find out what interest rate your FICO score qualifies for.

  29. Hakib says:

    Just for the record, when I graduated from college in 2008, after having NEVER used credit cards before, and entering into a job making over 50K per year, Target was the only company that would give me a credit card, PERIOD.

    Wachovia? (my bank) Denied
    Chase? Denied
    CapitalOne? Denied

    Target? Accepted w/ a 300$ limit.

    6 months later, CapitalOne w/ a 1000$ limit.

    1 year later, BarclayCard w/ a 4000$ limit.

    … I’m slowly building credit, but let me tell you, sometimes these store cards are the only cards we can get.

  30. moonbunnychan says:

    I can’t even tell you how hard it is working at a store with a card. We’re pressured every single day to get people to open them, and the general philosophy is that everybody wants one, and if you don’t get them to open one you’re doing something wrong. It’s awful, since I don’t believe in pressuring people into debt. But it’s so bad that your hours even depend on how many you open.

  31. muenginerd says:

    I am typically against store credit cards, but there are 2 am a big fan of and that’s Best Buy and Kohl’s.

    Best Buy…I only use it for large electronic purchases. If I can get 18-months to 3 years no interest, I leave that money in my savings and then pay it off with 2-3 months left on the promotion.

    Kohl’s … I love their discounts! I know everyone gets discounts but the better shopper on their card the better discounts you get. I’ve had this proven out through friends in Kohl’s credit department. I don’t shop their now unless I get 30% off, the computer has figured that out, and every coupon coming to my door is now 30%. Of course I won’t use the card on ever little purchase, but I have no problem taking 30% off a new winter wardrobe.