Store Credit Cards

We’ve all been there. You standing at a store counter, waiting to buy a shirt. The store clerk starts to ring up the sale. She stops suddenly, before asking ever-so-innocuously, “Would you like to save 10 percent on this purchase?”

You don’t get a discount for nothing, or course. To get the deal the clerk is offering, you’re going to be asked to apply for a store card. Almost never will you hear the word “credit card” in this situation, but that’s exactly what it is. And getting them can have negative consequences that can follow you for years.

The store credit card industry was hit hard in the Great Recession, as consumers cut back on non-essentials, and in turn, the credit cards that gave them deals on those extraneous purchases. But as the economy is recovering, so is the store lending industry. According to the Federal Reserve, the industry accounts for a whopping $270 billion in sales in 2013.

It’s a highly profitable industry that makes retailers a lot of money — which is coming out of the consumers’ pockets. Before jumping at the opportunity to save 10 percent on that shirt, you need to carefully consider what you’re getting yourself into with a store credit card.

The pros and cons of a store credit card

I had mentioned earlier that store cards are credit cards. Used wisely, they can have advantages. But their potential disadvantages are quite severe, and it’s essential to be aware of them before telling the clerk that yes, getting a discount on that shirt does sound like a good idea.

Here’s a rundown of what’s good and bad about store credit cards:

Pros of getting a store credit card

Establishes credit. When I was 17 I unwittingly began my credit history by signing up for a store department card, making a single purchase, then paying off the bill. I didn’t know I had done it, but that single act established me as a trusted borrower, at least in the eyes of potential lenders, beyond the walls of Famous-Barr department store.

You don’t start life with a good credit history. To establish one, you have to do two things: borrow money, and then pay it off. Starting with that shirt, you can be on the path to establishing a good credit history. In turn, it can get you qualified for more favorable loans and cards with perks and much better APRs than what is offered to the rest of the populace.

Store credit cards are quite easy to obtain; after all, the clerk is offering to set you up right there. And if you can control your spending, it can be an effective way to start building good credit.

Gets you discounts. This is the one the offering store will be honest with you about. It’s invariably the first sentence of their pitch. “Do you want to save money?”

The benefits are undeniable. Ten percent off a shirt is 10 percent off a shirt. Those savings are immediate and tangible, and the card will allow you to take advantage of them in the future as well.

Potential for perks. A few cards offer perks in addition to discounts. Best Buy, for instance, offers 10 percent back in rewards on purchases for a six-month trial period. So if you are able to control your spending, you can actually come out ahead on your purchases.

The cons of getting a store credit card

Absurdly high APRs. The so-called private-label credit card industry is a very lucrative one because it entices consumers to spend immediately while simultaneously roping them into paying loads of interest. The average APR of store credit cards is about 23 percent, as opposed to 15 percent for standard credit cards.

And don’t think you’ll be exempt from this high APR just because you have sterling credit. For instance, Target’s REDCard has an APR of 22.9 percent, regardless of credit. The APR is only adjusted in accordance with the prime rate (or the lending rate guidelines established by the government) and is not affected by the applicant’s credit history. What do you get in return? A measly 5 percent discount, only at Target.

Potential for falling in the debt hole. Anytime you borrow money you risk falling further into debt. And while store cards are not advertised as such, that’s exactly what they do: put you at risk of becoming indebted to the company and weighed down by increasingly oppressive interest payments.

To wit: the REDCard from Target carries both a high APR and requires payment on purchases within 25 days of the end of the billing cycle. Any balance left over is subject to that 22.9 percent APR. And if you miss a payment, tack $35 on top of it. Did you forget you bought that shirt on credit? One $10 shirt could end up costing you nearly $50 after just missing one payment.

Hurt your credit score. When you do something like check your own credit score you are performing a “soft” check. Contrary to a pervasive myth, merely checking your own score does not lower your credit. However, when a potential lender like a store offering a card does a credit check to see if you qualify, they are performing a “hard” check, which usually lowers your score.

How much? Anywhere from a couple of points to as many as 10. Every time you apply for a credit card it can drop a bit. And it can drop again when the account is officially opened. Of course, you can raise that score back up by racking up purchases on and paying them off. But do not doubt that the immediate effect of applying for a store card will be a lowering of your credit score.

So are store credit cards worth getting or not?

To be sure, you can use a store credit card and not ruin your credit, and in turn damage your life. They can be used responsibly. But, when you weigh the risks and the rewards, the answer to getting a store credit card — that is, the answer to whether or not you want 10 percent off that shirt is unequivocally, no.

If you can qualify for a regular cash back credit card, you can enjoy much of the same benefits of a store credit card without subjecting yourself to high APRs. It also offers more flexibility in where you’ll earn rewards.

For instance, the Discover it® card offers 5% cash back on certain categories that change every three months when you sign up. Home improvement stores and department stores are often on the category list. Moreover, Discover has an online shopping portal that offers bonus cash back on many online retailers. Some major names include Target, Best Buy, Macy’s, Bloomingdales and Walmart — all of which are eligible for 5% bonus cash back (that’s on top of 1% base cash back on the Discover it® card, for 6% total cash back). If you think about it, it’s like having a store credit card for multiple stores.

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