Over at MoneyTalksNews.com, Stacy Johnson looks at the pros and cons of store credit cards, but here are the basic questions you need to ask yourself:
1. Is a 10% discount really worth the risk of a 25-30% interest rate?
Most store card offers give the customer an immediate discount (say 10-15%) off his first purchase, but they also tend to come with sky-high interest rates, sometimes as high as 30%.
If you’re just using the card the one time to make that one purchase and you pay the card off in full in a very short period of time (and you don’t make any additional purchases), you end up getting all or most of that initial discount. Each month the card account isn’t paid in full is another chip of the chisel on that 10% you saved at the point of purchase.
Even though it’s what the store and the card issuer are banking on, these high-interest cards really shouldn’t be used for purchases where there isn’t a deep discount for using the card.
One concern not mentioned in the MoneyTalksNews story is that several store credit cards offer tempting, but potentially dangerous, deferred-interest plans, that lure the customer in with a no-interest or low-interest introductory period. The poisonous core of these deferred-interest cards is exposed when the cardholder fails to pay off that purchase in full by the end of the intro period, and is then hit with all of the interest for the full value of the initial purchase.
So say you used a deferred-interest card to buy a $2,000 washer and have 12 months to pay it off. If that 12-month intro period ends and you still have $50 left to pay off, you are charged the interest (again, often at 20-30% APR) not on the $50 balance, but on the $2,000. Suddenly what had been a great financing deal for you is a better deal for the retailer.
2. Will I Ever Use the Card Again?
Maybe that store charge card doesn’t come loaded with sky-high interest rates; not all of them do. Even so, can the card be used elsewhere? While some store credit cards are really just store-branded Visa/MasterCard/AmEx cards, meaning they can be used anywhere those cards are accepted, many store cards are only for use at that particular retailer. They also tend to have very low initial credit limits, so even when you have the ability to shop elsewhere, you might be limited as to your spending ability.
Some store-only cards do carry perks, like rewards points and discounts, to make up for the lack of flexibility. But if they don’t — or if these rewards also come with the aforementioned risk of high interest rates — you’d probably be better off just using the boring old credit card you already have.
3. What Will This Do To My Credit?
For people with minimal credit history, or one that needs a bit of tidying up, a store credit card could help (notice we don’t say it will help) if used properly.
Since these cards often have low spending limits, consumers with credit history issues sometimes stand a better chance at getting a store card than they would when applying for a traditional credit card. That said, it is up to the cardholder to spend responsibly and pay off his debt in a timely manner if he wants to improve his creditworthiness. In the hands of a careless consumer, even a small-limit store card can do significant damage if the balance goes unpaid.
Those consumers who have decent credit histories should be aware that all credit card applications will ding their credit scores in the short run, so if you’re looking to apply for a mortgage or other loan in the immediate future, you may want to avoid anything that could shave even a few points from your score if you don’t need it.
Another issue is having too much available credit. “When reviewing loan applications, creditors not only consider how much debt you have but also how much existing credit is available to you,” explains Johnson. “If you already have enough credit to go on a $20,000 spending bender, lenders might be hesitant to give you access to more cash.”