Is a Store Credit Card a Good Idea?
Really, how much is an in-store discount worth?
“Would you like to save 15 percent today by signing up for a store credit card?”
You pause. 15 percent? That’s a pretty good deal. You look at the items you’ve collect and fight with the items in your bag. Are they really worth full price, when the offer is right there? Will you do it?
Okay, so maybe signing up for a store rewards program isn’t the most important decision you’ll ever make, but it deserves more than just a split-second thought. Make sure you know what you’re getting into, besides 15 percent off today:
There are usually only two types of store cards.
Store-branded only get perks when shopping at a specific store, whereas co-branded cards usually work at any retailer. The difference is that a co-branded card is producer by a major credit card company and sponsored by the store. Both will get you points and rewards for shopping at the retailer, but co-branded cards can be used anywhere.
Here’s the good news:
Store cards are a great starting place to build credit, since store-branded cards cannot be used in other places besides the store. They also are available to those who have a hard-time getting approved for a traditional line of credit.
Plus, the rewards are nice as well. Member-exclusive events and discounts are useful saving perks.
And here’s the bad news:
Generally, these cards have a higher annual percentage rate (APR) than traditional lines of credit. The average APR for the largest retailer’s store card is 23.23 percent. The national average for a fixed-rate card is 13 percent, and the average for a variable rate card is 15.6 percent. While they are convenient, you can expect to pay more interest.
If the sole purpose of signing up for the card is the build your credit score, you should also proceed with caution. Signing up for a lot of cards at once may actually hurt your score. Credit score expert Barry Paperno asserts that opening up multiple lines of credit in a short period of time will have an immediate negative effect. In the long run, if you maintain your payments, it will probably help you.
However, what’s most important is your credit utilization. Credit utilization is the ratio of how much of your credit you use versus your credit limit. For example, if you spend $200 of your $1000 limit, you have a credit utilization of 20 percent. Credit utilization is 30 percent of your credit score, so you’ll want to keep this low.
In the end, it’s always best to rely on your bank:
While store cards and their discounts might be intriguing, it’s important to rely on your bank when it comes to credit. Even if you’re looking to build you credit score, it’s most likely that your bank has a ‘starter’ card that will help you with that.