If your holiday shopping takes place at brick-and-mortar stores, you will likely be asked to apply for a store credit card. Two out of three shoppers reported impulsively applying for a retail credit card, according to a recent CreditCards.com survey. You could accept these offers and the discounts that accompany them, but doing so may not be the best decision for your long-term finances.
In general, store credit cards should be avoided. But there are some advantages to them. Let’s take a look at the benefits and disadvantages of store credit cards.
The Benefits of Store Credit Cards
Store credit cards are designed to provide special discounts at the places you shop. The more money you spend at the store, the more rewards you earn and the more money you might save. You may be able to get a sizable discount on your initial purchase by shopping with a store card. The amount of money you save will depend on the type of card you use and how much money you spend. But a typical discount on your first purchase with a store credit card is 10%.
Store credit cards also give you a chance to buy items when you don’t have the money readily available. For instance, if you want to surprise your spouse with a flat screen TV, you could put that charge on a store credit card and pay it off in the coming months.
Reasons to Avoid Store Credit Cards
Even though store credit cards offer rewards and discounts, they are known for having much higher interest rates and fairly low credit limits. The 10% you save on your initial purchase may cost you a lot more in interest if you can’t pay off your balance.
Store credit cards also act as a temptation you may not be prepared to handle. It’s easy to spend more when you do not have to hand over cash for the item. That may not make sense for your long-term financial goals.
Every time you open a new credit card account, there will be a mark on your credit report. Too many marks can adversely affect your credit score. So it is not a good idea to apply for a number of store credit cards during the same shopping season. The stores are the ones benefiting from you opening up a store credit card account. They know they can earn back all of the money you save in interest and extra purchases. In addition, you are now part of their mailing list, so you can expect to be flooded with frequent emails from this company.
How to Use Store Credit Cards While Sidestepping Some Pitfalls
If you want to get the savings without the high interest in the future, here are a few safe ways to use store credit cards during the holidays:
- Only use a store card for an item for which you already have the cash. Then, pay off the balance in full and on time. In this way, you will not be hit with the exorbitant interest penalties that usually come with store credit cards.
- To make sure you don’t miss a payment deadline, set up reminders in your calendar to pay the bill. In some cases, stores may offer autopay so you don’t miss a payment.
- Stick to your budget. Avoid temptations of buying additional gifts; if you give in, you will likely feel this financial pain well into the new year.
- Read the terms of the card carefully before signing up so you do not lock into any kind of annual fee. You may also want to look at how the rewards system works as some will only issue rewards for full-priced items.
- Do some price comparisons before signing up for a new card to see if any other store already has prices lower than the discounted rate with the card.
- Only sign up for cards for stores where you regularly shop. In this way, you may have an opportunity to continue building rewards after the holidays.
If you are considering opening a store credit card account due to the initial discount, make sure that discount outweighs these pitfalls. Assess each credit card offer that comes your way, and only apply for the ones that will work best for you.