You’re checking out at your favorite retailer when the cashier asks if you’d like to open the store credit card. “It’ll save you 15% on today’s purchase,” he says, “plus you’ll get all these other advantages—cash back, exclusive coupons, special sales, and more!”
Sounds tempting, but it’s important to be a savvy shopper and do your research before saying yes. You may be the perfect candidate to benefit from that store’s card—but you can also end up paying for the perks in other ways, from hits to your credit score to exorbitant interest rates. Here’s what you need to know to decide whether this store card makes financial sense for you in the long run.
Read the Fine Print
First off, don’t choose your card solely based on a sales pitch at the cash register. Take the application home, review it on your own time, and decide whether the card is truly worthy of your initial enthusiasm. For example, at first glance, Wal-Mart’s card offers 1% cash back on all purchases. If you read the disclosures, though, you’ll see that you have to spend $3,000 per year in the store before you get the full 1% back.
In addition, most store cards charge interest rates that are double that of a regular card—often more than 20%. So, if you don’t pay off the entire balance on the card each month, you won’t really save anything. You may, in fact, pay more than you would have without the card!
Consider Your Credit Score
Next, it’s important to think about how opening another card will impact your credit score. If you don’t have a lot of credit history, store credit cards can actually boost your score, since they’re easier to get than traditional cards. (Just remember that all of last column’s lessons still apply: Only by managing the card well will you see positive effects on your credit.)
But if you already have decent credit, store cards carry a few risk factors that can make them more likely to lower your score. Because they typically have lower credit limits (around $1,000 tops), it’s easier to max them out, which will drop your credit score. (Just another reason paying your balance off each month is key!)
You also don’t want to apply for a lot of cards at once, especially tempting during the holiday shopping season—each inquiry can drop your score by 10-30 points for the next 12 months. Multiple new credit accounts will also lower the average length of your credit history, which can dock your score as well.
Remember that a lower credit score means higher interest rates. So in the long run, the savings you’d get by opening multiple cards is probably not worth the higher rate you’ll pay on future loans.
Pick the Right Card
All this said, the right card can offer you great savings at the places you shop the most. (Here’s a handy snapshot guide to the best credit cards to use for different retailers.) Just make sure that the one you choose matches your shopping habits. Getting a great deal at Sears on this particular purchase, but never going to shop there again? You probably want to pass. Pick a store where you’re already a loyal shopper to maximize the benefit.
One exception to this rule: Large purchases at electronics stores like Best Buy, which often offer 0% financing for six months to a year if you sign up for a card (as long as you pay off the full balance at that point). So if you were planning to put the purchase on another credit card and not pay it off right away, this type of store card can save you on interest charges over the year.
Done right, you can save yourself a lot of money and pick up some extra perks with a store credit card, but shop around wisely to make sure you get the best deal. (And keep in mind that you can sometimes get similar perks just by signing up for the company’s email list!)