Why You’re Better Off Without a Store Credit Card

CardsBull's picture
Why You’re Better Off Without a Store Credit Card

December is that time of the year when consumerism really rears its ugly head - holiday themed items can be purchased seemingly everywhere, crazy deals and savings are posted around stores to lure you into shopping, and stores get more crowded by the day.

How many times have you stood at the checkout counter of a retail store while the cashier tried to convince you to apply for the store credit card on the spot, in order to save some 10-20% (or more) on your purchase? Sure, it sounds tempting to be able to save money on all the gifts you’re treating your family, friends, and yourself to during this month, but it’s important not to be hasty when opting out for a store credit card.

Of course, the savings are not a joke - you would be saving whatever percentage you’re offered on your purchase if you sign up for a credit card. Keep in mind, however, that retailers do take advantage of your vulnerability, especially during this time, because they know you’re likely to make an impulsive decision due to initial shock when you see your total owed amount. In order to make an informed decision, instead of an impulsive one, it’s crucial that you give yourself time to think about your financial habits, needs, and behavior, but also your future plans and your current financial situation.

While there might be good reasons to opt for a store credit card, it’s usually not the brightest idea. Here’s why you shouldn’t sign up for one.

1. High Interest Rates

Store credit cards are notorious for high interest rates, making them very unpopular with finance connoisseurs. The APR (annual percentage rate) on your average store credit card is a whopping 24.99%, compared to the average APR of 16.15% for general-purpose credit cards. Sure, if you’re always on top of your payments, and you manage to pay off your balance in full each month, then there’s no need to worry about the APR. But how realistic is this? Especially during the holidays, otherwise known as the official time of financial strain.

Leaving a small balance on your card for a couple of months could potentially accrue interest payments which could easily offset the money you tried to save in the first place. If you’re looking to save and give yourself time to pay off your holiday gifts, then a store credit card is probably not a good choice for you. You won’t be saving any money, and you’ll just be stuck with a card that you probably won’t use until you’re ready to make your next cardinal mistake.

Retailers offer these cards with the intention to see customers come back to their stores. Those who have little self-control and foresight probably will, and it’s very easy to rack up a huge bill once you’ve convinced yourself that it’s possible to save, because you have your card to fall back on. Many retail credit card owners get carried away and are left with credit card bills which they can’t pay off on time; the only thing they can do is watch the interest accrue, their discount entirely negated. If there’s even the slightest chance of you not being able to pay off your balance in full each time, stay away from store credit cards.

2. Impact on Your Credit Score

Many people believe that store credit cards can help you establish or improve your credit history, because retail store credit card issuers, unlike general-purpose credit card issuers, are more likely to approve individuals with lower credit scores. There’s a catch to this, if you weren’t already able to tell. Store credit cards are generally harder to qualify for, but this is not the main issue.

Usually, a store credit card limit is quite low, which holds the potential of decreasing your credit score. It is suggested that you keep your balance at 30% or less of your credit limit, and with good reason, since your credit utilization makes up 30% of your credit score. If the limit on your card is $1000, you are likely to spend over $300 on a shopping spree, which is 30% of your total limit. Especially during holidays, it will be easy to go overboard. Keep in mind that you might be approved with a lower limit - which just increases your chances of overusing your card and lowering your credit score.

This is not the only problematic thing. Each credit card application equals one hard inquiry on your credit report. Having multiple hard inquiries on your credit report within a short amount of time can hurt your score badly. If you, for some reason (like holiday shopping), decide to open a couple of different retail store cards in order to save some money, you’ll be hurting your score, and probably not really saving as much as you think.

3. No Good Signup Bonuses

We all like to save a couple of dollars here and there. If I can save $20 on a $100 purchase, why would I pass up on it? It might seem like a good deal, but it’s important to look at the bigger picture.

Most retail credit card issuers offer merely 10-20% discounts upon sign-up, and there’s rarely more signup benefits than that. If you take all drawbacks into account, is it really worth it putting your credit score and and finances in jeopardy for a small discount in one particular store, when you can apply for a standard credit card which offers a much bigger signup bonus and rewards on all your purchases?

You’re right, it’s not worth it. If you’re going to go through a hard inquiry, you might as well get the most out of it. If you opt for a standard credit card, you can use your big bonus for shopping, and still get cashback on all your holiday purchases! No worries about your credit score or interest - two things you want to be worrying about the least as you enter the new year.

4. Shopping Restrictions and Limitations

Sure, if you’re someone who’s responsible and has a lot of self-control, a retail credit card is not the worst idea out there, but why limit yourself? There are plenty of cards out there which offer much better deals, cashback options, and signup bonuses - why settle for something that doesn’t come close and can probably onle be used in one place? If you opt for a standard credit card, you probably won’t end up tossing it aside after that one purchase; you will actually make good use of it and get actual benefits. What’s better: always shopping at JCPenney, hoping for occasional discounts, or being able to shop anywhere, and always count on cashback and points? It is generally a much better idea to opt for a card with no-fee balance transfer and a 0% introductory APR.

Also, knowing that you have a store credit card has the potential to make you stop by and shop at that particular store whenever you walk by it. This does not seem like the worst thing in the world, but it could easily get out of hand - you could go over your budget, accrue interest, and possibly ruin your chances to get better credit cards because an impulse decision lowered your credit score.

5. Might Be a Hassle to Cancel

People are a lot more likely to regret opening a retail credit card, as they mostly do it on the spot, as a rash decision, without weighing the pros and cons. That is why many people are eager to cancel their store credit cards after only a couple of uses. Keep in mind that closing a credit card might not be the best idea out there, depending on your situation. However, if you’re sure and have good reasoning to close your retail credit card, keep in mind that credit card issuers are not going to make it easy. Canceling your card might end up being a huge hassle, which will offset all the money you manage to save. Retail stores want you to keep your card, because they know that as long as you have it, you’re tempted to use it. That’s why it’s crucial to think critically and not give in to pressure at the checkout counter!

What if You Really Want a Store Credit Card?

It’s important to keep in mind that store credit cards are a good fit for some people. Those people are individuals with extreme self-control, good financial standing, clear minds, and ability to keep track of every single payment they need to make. Unfortunately, so many of us are not the best at this. It’s not that you shouldn’t apply for a store credit card because you’re irresponsible. No, the reason is that it’s human nature to make mistakes and forget about a payment, or to simply not have enough money to make a payment. This can happen to anyone. Why risk being charged high interest and hurting your credit score, when you can still manage to save and protect your money with a regular credit card?

Finally, if you do opt for a store credit card this December, take it very seriously. Pay your balance off in full each month and don’t be tempted to use your card every time you hit the mall. Also, make sure not to apply for countless cards in a short period of time, but also not to close a bunch of cards at the same time, as that also holds the potential of hurting your credit score. Lastly, if you do have a store credit card, keep your credit utilization ratio below 30% - trust me, it’s for the best.