Personal Finance
Money at 30: Are Store Credit Cards a Good Idea?
When is the last time you went into a clothing store, department store, or other chain retailer and weren’t offered a new credit card upon checkout? These pitches typically come in the form of “would you like to save an additional 20% on your purchases today?” but most of us know the drill at this point. Sometimes these promised savings may be tempting but, alas, these store credit cards aren’t as simple as they may seem. That said, there are some cases where they might actually make sense for your wallet.
If you’re considering signing up for a new store credit card, here’s what to look for and what to look out for:
The Problem with Store Credit Cards
Low credit limits
One of the main problems with many store credit cards is that they typically offer very low credit limits. Instead of most cards that will start you off with a few thousand dollars in spending power, some store cards might only give you a few hundred dollars. The problem with this is that it could negatively affect your credit utilization, even if you’re only spending a small amount on your card.
Credit utilization refers to the amount of revolving credit you have available compared to how much you’ve used. For example, if you have a $500 balance on a card with a $5,000 limit, your utilization is only 10%. However, if you put $250 on a store credit card with just a $500 limit, that 50% utilization could drag down your credit scores. That’s why it’s often better to look for an all-purpose card with a higher limit to avoid such utilization issues.
Age of credit and inquiries
Speaking of credit scores, age of credit and new credit inquiries are also things to consider when applying for a new store credit card. As for your age of credit, this figure is an average of how long you’ve had your various credit accounts. In this case, older is better. Unfortunately adding a new card could bring down that age.
Another way credit applications affect your scores are with credit inquiries or “hard pulls.” Every time a creditor requests to see your credit report and score, a note is added to your report. In turn, these marks can end up causing a slight dip in your scores. With some cards, the benefits of having increased revolving credit will outweigh these negative effects but, with store credit card limits being so low, this might not be the case.
Deferred interest
On top of the promise of immediate discounts or subsequent coupons, one selling point of some store credit cards is 0% interest. That might sound like a great deal but it’s important to pay attention to the fine print. In many cases this 0% interest rate is only for a limited time. Furthermore several stores will offer what’s known as deferred interest on things like furniture or appliances. This means that, if you pay off your item in the set amount of time, you will end up paying 0% in interest. But, if you exceed the time granted in your introductory offer, you’ll not only be on the hook for any new interest but will also have interest retroactively applied.
You’ll also want to pay close attention to your card statements and ensure that you’re actually paying off your deferred interest item. When my wife and I were considering applying for a store card with deferred interest on the furniture we were buying, we learned that our payments would be applied to our other purchases first. This means that, if we were to purchase clothing or bedding on our card but only made standard payments toward our big-ticket item, we might end up falling behind and missing the deferred interest deadline. That’s why it’s always wise to know the terms of such offers and ensure you pay off your items in time.
Limited options
Finally another thing to consider to when presented with a store credit card offer is that you’ll likely only be able to use the card in that particular store. This is notable because there’s always the chance that the store will close or that you’ll merely outgrow a certain retailer. Should that occur, closing your card may be an option, although that can have some negative credit effects as well.
The Good in Store Credit Cards
Co-branded cards
As I mentioned, there was a time when my wife I were considering getting a store credit card. In fact we did end up getting it. The reason this situation was different was because, instead of just being a regular Macy’s card, it also bore an American Express logo. This not only meant we’d be able to use the card outside of Macy’s but also included a larger credit limit than most private label cards. (P.S. — we paid off our couch in more than enough time to avoid paying interest, so don’t worry.)
Initial discount
Admittedly the main reason we ended up applying for the Macy’s AmEx wasn’t for the deferred interest financing but for the $100 discount we’d receive with the card. This was actually the maximum dollar amount you could get as part of their promotion and so we thought we’d take advantage of it while buying our sofa. I do find it laughable sometimes when salespeople ask if I want to save 10% on my measly purchases since the juice isn’t worth the squeeze, as they say. But, in this case, the savings made the card sensible for us.
Additional savings
Lastly one reason we were okay with getting a Macy’s card was because the retailer ranks as one of our go-to department stores. Thus we’ve been able to make use of the occasional coupons the card entitles us to as well as the “extra 15% when you use your card” offers that pop up from time to time. As a result we’ve been able to get good deals on needed items such as flannel sheets, work clothes for my wife, and a spinner suitcase for our travels.
The requests to sign up for store credit cards sure can get annoying — especially around the holiday season. Adding to the frustration is that these types are cards are rarely a good idea given their multiple limitations and possible credit consequences. At the same time, when used properly, they can also be used to gain discounts and increase your revolving credit. Ultimately the decision of whether or not a store credit card is a good idea will depend on the situation and the card itself. But, if you aren’t sure, it’s probably better to just decline.
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