When a cashier offers you the opportunity to save 10% on your purchases by signing up for a store credit card, they probably won't mention the 20% interest rate the card carries.
At bread and butter retailers like Walmart and department stores like Macy's, cashiers push store credit cards in the checkout line. Often, a special deal is attached. At the Gap, for example, you may be offered a 10% discount on your purchases. At Home Depot or Lowe's you may be offered the option to pay nothing for 6 months. On the surface, many of these offers are appealing. And, to some consumers, these deals are actually very good. However, the friendly cashier probably won't point out a massive drawback to these offers: absurdly high interest rates.
The Positives: Before we delve into the major negatives of store credit cards, we'll look at the positives, or rather, the positive: special deals. Generally, these deals apply to purchases made on the day you sign up and can provide 15% to 20% off. A deal like this is often too good to pass up, especially if you are spending a few hundred dollars on a holiday gift. Unfortunately, if you are unable to repay this credit card quickly, interest rates in the 23% range will quickly erode your savings. Thus, if you know you will not be repaying your bill within a few months, you may be much better off passing on the deal. However, if you have the cash available to repay your bill immediately, by all means, take the discount and run.
The Negatives: It only took a paragraph to discuss the positives of store credit cards. To examine the negatives, we're going to need a little more space. Below, we've broken them down in order of importance.
1.) Store Credit Cards Charge High Interest Rates: The preceding statement not only deserved to be in bold, but it should also be underlined, italicized, and followed by about seven exclamation points. As this article is written, the average interest rate offered by major credit card issuers ranges from 9% to 15%. Additionally, these credit cards also offer 0% interest rates for 6 Months (for more information, see 0% APR credit cards). Store credit cards, on the other hand, generally charge interest rates of 20% or more. For example, on December 2nd 2008, the Macy's Star Rewards credit card charges 22.9% interest. The GapCard offers a slightly lower 21% interest rate. Love Best Buy? Want to take advantage of the Reward Zone program with a Best Buy credit card? If so, be sure to pay your bill in full every month, because the interest rate is 24%. Similarly high rates apply to the Home Depot credit card and Lowe's credit card.
Not all store credit cards offer such harsh terms. However, even the best store credit cards still charge relatively high interest rates. The Target RedCard credit card charges up to 21.99% while the Wal-Mart credit card charges up to 19.87%. Both credit cards offered tiered pricing, so individuals with better credit card get lower rates. However, neither the Wal-Mart of Target RedCard offers provide much in terms of special offers.
2.) Applying for Store Credit Cards Hurts Your Credit Score: When you apply for a credit card, your credit score is typically decreased by 10 to 30 points. However, with regular credit cards there are often offsetting factors that can actually make applying for a new credit card a positive. For example, if you had been utilizing more than 30% of your available credit limit before getting a new credit card and the new credit limit reduces the percent of available credit you are now utilizing, your credit score should improve. However, store credit cards often come with low limits, and the purchases you make could take up a large percentage of your available balance. This, in effect, is a double whammy. Your credit score is hurt by both the application and the fact that you are using a larger portion of your credit. In the current credit environment, this can result in higher rates for all types of loans, especially mortgage and car loans. A friendly cashier won't tell you that the $27 you save by signing up for a store credit card could wind up costing you thousands of dollars on your next mortgage. But it could.
3.) Store Credit Cards are Ultimately Useless: Have you ever tried using your Best Buy credit card at the grocery store? Or your GapCard at a gas station? In my experience, they don't work. In today's credit environment, getting approved for a real credit card is difficult, even for people with good credit scores. So if you need a credit card to pay for holiday expenses, you might as well get one you can use everywhere. Not only will you save money with 0% APR deals and lower interest rates, you'll also be able to use your credit wherever you need it.
Final Thoughts: If you have the money to pay your balance in full immediately and aren't concerned about losing a few points from your credit score, a store credit card may save you a few dollars in the short term. However, high interest rates and the collateral damage to credit scores that come with store credit cards more than offset the couple dollars you might save. If you need credit, avoid the offers of the friendly cashier and seek out a good deal with a standard, low interest, 0% APR credit card.
*Important Disclaimer: See online credit card applications for complete terms and conditions. While reasonable efforts are made to maintain accurate information, all credit card information is presented "as is" and without warranty. When you click an "Apply" button, review the credit card terms and conditions on the issuing company's website.
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