Have you ever been approached by a sales person who offers you the chance to save 10, 15 or 20 percent on your purchases in the store that day? All you have to do is fill out an application for a store credit card.
If you have a full shopping cart or if you're making a big purchase, the proposal can be especially tempting. Plus, if your plans for the day include stopping at several stores, you might even decide to open up accounts at all of them to capture some really big savings.
As with so many things, what seems like a good idea at first glance may actually have some fairly negative consequences. So before you fill out that application, make sure you understand what you're really getting into.
When you apply for a credit card through a bank, that bank checks your information carefully, looking for evidence (such as a decent credit score) that you understand how to keep your debt under control and pay off your bills. If the bank thinks you're too much of a credit risk, you won't get a credit card, or your limits will be fairly low. That makes it harder for you to overspend.
But that same kind of scrutiny or oversight usually doesn't happen with store credit cards. Some stores don't even check credit applications before handing out credit cards. That makes it easier for someone who's not very good at handling money to get deeper into debt.
Interest rates on store cards are usually high--often several points higher than the rates on credits cards issued by banks. So if you aren't able to pay off your store credit card bill each month, you'll owe more in interest than you would if you were using a bank credit card. That extra interest can add up over time, and you could end up spending more than you originally saved by opening up the store credit account.
Even if you consistently pay off all your credit card bills each month, opening too many store credit cards within a short period can damage your credit rating, especially if you apply to several stores for credit within a short time.
Credit rating companies don't like to see multiple credit inquiries on your account within a short period. They are concerned that with multiple new accounts you could spend too much money and be unable to repay it, so they lower your credit rating. When that happens, other credit card issuers may raise your interest rates on new purchases that you make because you're seen as a bigger risk. Or, if you're thinking of buying a car or a home, you could end up paying higher interest for a car loan or a mortgage.
Some stores offer special deals to their credit card holders, such as zero percent interest on a big purchase for several months. That can yield some savings as long as you remember to pay off the card within the required time frame; otherwise, you can end up paying high interest retroactively. Sometimes stores offer special sales or extra discounts for people who use their credit cards. This can tempt you into buying more at that store than you otherwise might buy.
Although store credit cards can be useful in certain circumstances, you want to make sure that you completely understand all of the important details, like annual percentage rates and late fees, before you apply for one. Don't let the short-term advantages of a store credit card blind you to its possible long-term negative consequences.