It’s probably happened to you. You go to check out at a department store or other retailer, and they tempt you with a discount—if you open a store credit card, you’ll receive 30 percent off your purchase, or some other percentage.
You may think it’s a deal. Money is tight, and here’s a chance for a discount. But is opening up a store credit card good for you? Is it the right way to use your credit?
One-Time Discount
Some stores offer a percentage off your purchase. Or they could provide a flat-rate discount off a minimum purchase amount. And although some stores let you have that discount for the entire day you opened the account, it’s still a one-time discount.
Don’t treat a store credit card as a coupon for the day. The exception is if you are making a large purchase. Otherwise, managing another line of credit may not be worth it. And it has long-term effects on your spending and on your credit.
Opening Store Credit Cards Affect Your Credit Score
When you apply for a credit card, the store makes a hard inquiry into your credit. If you do this once, your credit score may be OK.
But if you apply at various stores to take advantage of discounts, you’ll probably see a couple of points dip in your score.
And regardless of whether your store card is approved or not, you’ll have that hard credit inquiry on your score.
If you open a new credit line, you’ll change the landscape of your credit profile. The new card will lower your account’s average age. That means the amount of time you’ve had a credit card or loan. To lenders, this could make you look like an inexperienced borrower.
A credit line’s average age makes up 15 percent of your credit score in scoring models.
Lower Credit Limits
Store credit cards typically have lower limits than bank or credit union cards. That may not seem important to you, but these low limits could affect your credit score.
The lower limits could drive up your debt-to-credit ratio. In scoring models, the debt-to-credit ratio makes up 30 percent of your credit score.
If your ratio is higher, it signals to lenders that you’re a risk. They think you may have trouble paying back a loan.
Deferred Interest
A payment plan offer with no interest gives you months to pay off a big purchase like furniture or appliances. That store’s credit card looks good.
But check the fine print. Most of these have a deadline as to when you should have the item fully paid for. If you haven’t paid the purchase off before the deadline, you’ll have to start paying interest. Or even worse, you might have deferred interest, in which case you won’t have saved anything.
The interest rate will also probably be high.
Inflated Optimism to Pay Off Card
You may open store credit cards to take advantage of the savings. You’re optimistic that you’ll manage the card when returning home. After all, saving 30 percent is a great deal. But when all the bills come in, you may forget the plan.
If your balance carries over from month to month, you’ll pay high interest on your credit card. After a few months of paying interest, you’ll have effectively lost your 30 percent discount.
Temptation to Spend More
Stores know that credit burns a hole in people’s pockets. Store credit cards increase your temptation to spend more than you would normally. This is especially true when saving money the day you open the account.
For example, you might pad your order to take advantage of the discount.
Store Cards Have Expensive Terms
Store credit cards are notorious for having high interest rates. Some interest rates are higher than 30 percent. In 2024, the average rate for a bank credit card is 24.43 percent. And the average rate for a credit union is 12.86 percent.
Limited Rewards
Retailers, with some exceptions, typically only offer significant rewards on store purchases the day you open the account. You don’t receive much after that.
Some stores, such as Lowes, will give you 5 percent off all purchases when you use their store credit cards. But even if you’re spending hundreds of dollars a month, it still doesn’t equate to much. And remember that even if the MyLowe’s Reward card gives you 5 percent, you’ll be paying 31.99 percent in interest. If you carry a balance, you’ve eliminated the benefits of the 5 percent.
With a bank or credit card, you receive rewards such as cashback and points toward travel. This type of credit card can be used anywhere, you’re not limited to one store.
Should You Open a Store Credit Card?
Whether or not you open a store credit card depends on your goals. Be cognizant of how it could affect your credit score. And resist the urge to overspend so that you’ll have a discount. There are limited rewards that come with a store credit card, which may make them less attractive.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
From The Epoch Times