If you open a store credit card this holiday season you may want to limit yourself to one or two at the most. Because store credit cards are offered at the point-of-sale, it can be very alluring when the cashier asks if you want to apply for a store credit card to instantly save up to 20 percent on your purchase.
Department store credit cards can be quite tempting, but they also have some potential pitfalls. Here are 4 facts to consider before opening a store credit card:
1. Store credit cards have higher interest rates
Many retail credit cards have higher interest rates. The average credit card interest rate is about 15 percent while the average retail credit card rate is 20 percent or more. Now if you don’t plan on carrying a balance the interest rate may not be a big deal to you. However, if there’s a chance you carry a month-to-month balance a high interest rate should be of concern to you.
2. Low credit limits
Unlike regular credit cards, store cards aren’t widely accepted. They are typically only accepted at the retailer where you applied unless they have a major credit card logo such as Visa, Mastercard or American Express associated with them.
Store credit cards not associated with a major credit card logo usually have a lower credit limit. It can be easy to use most of your available credit when the limit is low. Using most of your credit limit on an account may result in a ding to your credit score because you'll have a high credit utilization ratio. FICO, the most widely used credit scoring model likes to see as much space as possible between your account balance and credit limit.
3. Too many Hard Inquiries can hurt your scores
Each time you apply for credit it can lower your credit score. The impact of one hard inquiry may only be 5 points or less but if you compound that with several applications it can add up quickly. The ding to your credit score is most likely temporary but nevertheless, you may want to steer away from multiple credit applications, especially if you are planning a major purchase such as a home or car in the near future. Lenders don’t want to see that you are adding lines of credit right before you apply for a major purchase.
4. Rewards not worth it
A 20 percent discount on purchases is nice but in most cases, unless you are buying a ton of stuff, the savings will not be very large. In contrast, many regular credit cards offer much better sign-up bonuses that can result in points or miles and even cash back rewards.
Just make sure the incentives are worth it. And consider, there may be other ways to get a discount that do not require applying for a new credit account. For example, some stores will provide shopper coupons when you register your email address, text them or like them on Facebook.
How to manage retail credit accounts
I you do open a store credit card this holiday season here are some tips on how to manage your new retail account:
- Keep track of your credit utilization. Store credit cards can start with low limits so be careful not to charge more than 30% of the available credit limit. A high credit utilization rate negatively impacts your credit.
- Use it regularly to keep it active. If you open the card to get a one-time discount and then forget about it, your creditor could mark it as inactive and may end up closing the account.
- Pay off your balance. You can avoid high interest and high utilization if you pay off the statement balance.