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Should I open a store credit card? 6 factors to consider

By Thomas Flynn/LendEDU

After spending an hour shopping and picking out just the right items, you head to the counter to check out. The cashier greets you warmly and asks if you are a cardholder. When you reply “no,” she beams at you and tells you that if you open up an account, you will get 20 percent off that day’s purchase.

When you are buying something pricey—such as a new laptop—that discount can be terribly appealing. However, before you hand over your information, evaluate whether or not that credit card really makes sense for you. While a store credit card can be a money-saving tool for some, it can be a huge mistake for others.

In a survey, 30 percent of adults said they felt pressured to open up a credit card at a store counter. Half of them ended up regretting opening up the account. That is why it is so important to plan ahead and decide whether or not you want to open up a new credit line before you get to the register.

Consider the following factors before opening up a new account to avoid feeling pressured on the spot:

Interest Rates

Store credit cards often have very high interest rates; the biggest retailers’ cards average 23 percent, eight points higher than the national average for other credit cards. If you are in a sound financial situation and pay your credit card balances off every month, the interest rate is no big deal. However, if you might carry a balance, you could end up paying much more in interest on the cards, negating the value of any discounts or rewards you received when you opened your account.

Credit Reporting

If you do not have any credit history, experts often recommend opening up a store card to establish your credit and build up your credit score. Application requirements for store cards are less rigid than for regular credit cards, so you are more likely to be approved. By using the card occasionally and paying off the balance in full, you can develop your credit history.

However, while some store credit cards report activity to the three main credit bureaus—Experian, Equifax and TransUnion—not all stores do. If it you sign up with a company that does not report to the bureaus, the credit card does not help improve your credit rating. Moreover, because store cards tend to have lower credit lines than other cards, your utilization ratio—an important factor in evaluating your credit score—can get high with just a few purchases. That can result in a lower credit score than you had in the first place.

Brand Limitations

Some store cards can be used at various locations, including their sister stores and other retailers. Other cards are very limited and can only be used at the branded store. If you are a loyal customer of the brand and shop there regularly, it can make sense to open up a store card to get regular discounts and coupon. However, if you shop at the retailer rarely, it makes more sense to get a credit card with another store that will give you more flexibility. A general rewards card, such as a card that offers cash back, can make better financial sense if you need more options.

Evaluate the Perks

Besides the discount you get for opening a new account, make sure you consider other rewards as well. Some store credit card benefits can be very valuable, such as free shipping and on-site tailoring, flash sale access and more. If you are building a work wardrobe, having these options available to you can save you a good deal of money.

At the same time, be mindful of how the incentives influence your shopping habits. Retailers offer those discounts and perks to nudge you into shopping and purchasing more items. If you open a card, make sure you stay within your budget to avoid racking up credit card debt.

Promotional Terms

If you are making a large purchase, such as a new television, you might be tempted by credit cards promising zero percent interest for 18 months or other similar offers. While that sounds like a great deal, make sure you read the fine print. In many cases, the interest is merely deferred for 18 months, but you are being charged interest the whole time. If you pay off the balance in full within that 18 months, you will owe no interest, but if you only pay the monthly minimums, you will end up paying interest for that full 18 months once the promotional period is over. A television that cost $1,000 can quickly balloon up to double its price with the accrued interest. Before making a big purchase and open a new card, understand the terms of the promotions to avoid paying unnecessary fees.

Impact on Credit

While a store credit can help you build your credit history, signing up for too many cards can hurt you. Every time the credit card company runs an inquiry before they approve you, your credit score will take a hit. If you need to apply for a car loan or a mortgage, your lower credit score will make you ineligible for low-interest offers. Plan ahead and sign up for only one card when you know you will not be making major purchases.

Major retailers know that the significant discounts at the register can lure you into making an impulse decision, leading you to open up a new credit card. That is why it is so important to think through where you shop, your credit history and your spending habits to decide ahead of time if you need a new credit card or not. When used responsibly, store credit cards can offer significant savings and other benefits. However, many people do not fully understand the terms of the agreement and end up swamped with sky-high interest rates and penalties. With pre-planning and research, you can make a decision that positively affects your finances without damaging your credit score.

LendEDU is a content partner of The Oxford Eagle providing news and commentary. This content is produced independently of The Oxford Eagle.