You’re standing at a register about to make a purchase and the cashier offers you a great deal that seems too good to be true: a big, one-time discount if you open a store credit card.
That discount could save you a pretty penny. But is it worth it? Should you open up that card or walk away from the deal?
Before giving into the pressure (and the discount), take some time to consider the pros and cons of signing up for a retail credit card.
Disadvantages of store credit cards
One of the biggest differences between standard credit cards and those offered by major retailers is APR (annual percentage rate), which calculates how much you’ll pay – in both interest and fees – each year.
According to the Federal Reserve, the average APR across all types of credit cards hovers just over 15%.1 Minimum APRs for store credit card typically start at 21%.2 Unless you know you’ll pay your balance in full each month (or before the end of a promotional period), that difference could cancel out your initial savings on that first purchase.
Low credit limit
Retail credit cards feature lower credit limits than standard credit cards.2 While that initially may not seem like an issue, an important factor in your credit score is your credit utilization (CU) rate. If your store credit card limit is $500 and you have a balance of $450, that CU could have a negative impact on your credit score.
Some store cards are “open loop,” meaning you can use them anywhere major credit cards are accepted. However, most are “closed loop,” which limits you to a single store or a group of stores. Written material about the credit card will contain this information. Another important reason to read the fine print!
The “special financing” that’s sometimes offered with your initial store card purchase – 0% interest or no required payments for a specified period of time – often has something ominous lurking behind it: deferred interest.
Deferred interest isn’t a problem if you pay off your balance in full before the end of the promotional period. But if you don’t pay off your balance, or if you’re late paying minimum payments, you’ll wind up owing all the interest that’s accrued over the promotional period, which will likely cancel out your initial savings.
Advantages of store credit cards
While there may be a significant list of cons when it comes to retail credit cards, when used responsibly, there are some benefits.
Store cards are typically easier to qualify for, making them a good way to build credit, especially if you don’t have much credit history. Many retailers also offer loyalty rewards and/or special discounts for card holders, which may be valuable if you’re a frequent shopper. And, if you have a structured plan to pay off your balance, you may be able to save money from that credit card promotion after all.
The verdict? Do your research.
Before signing up for a new credit card in a rushed, high-pressure environment, take some time to review the small print about things like APR and deferred interest.
It’s also important to figure out if getting another credit card is the best decision – and to be realistic about the likelihood of paying off your balance before the promotional period is over. Because that pretty penny you may be saving when you sign up may wind up costing you way more than pennies in the long run.
1 The Board of Governors of the Federal Reserve System. “Consumer Credit - G.19.” FederalReserve.gov. https://www.federalreserve.gov/releases/g19/current/ (accessed February 25, 2020).
2 U.S. News Staff. “Average Credit Card APR.” CreditCards.USNews.com. https://creditcards.usnews.com/articles/average-apr (accessed February 25, 2020).