Consumers shopping at a brick-and-mortar chain this holiday season may be presented with an offer at checkout: request the store’s payment card and receive an immediate discount on the purchase.
It may seem like a tempting offer, but there are a few things to consider first. Financial services company myFICO says opening a new store account could negatively affect your credit score.
This is a card that you may only be able to use at the store in question. Since it’s not used regularly, myFICO says it’s easy to forget a payment, and late payments can lower your credit score. The credit limit can also be quite low, so if that first purchase uses up most of the available credit — and you carry a balance for a while — your credit score can take a hit.
Higher interest rates
Ted Rossman, senior industry analyst at CreditCards.com, says there may be other drawbacks that make store cards less useful to consumers than a standard credit card. For one thing, he says store cards typically charge a higher interest rate.
“We recently averaged the midpoints of the APR (annual percentage rate) ranges offered by credit cards associated with the 100 largest retailers and came up with 24.35%, well above the 19.92% that we measured on 100 popular general purpose credit cards using the same methodology,” Rossman told ConsumerAffairs. “Both are high, but retail card APRs are often higher than general purpose cards, and they capped at 29.99%.
Getting a small discount probably isn’t worth it
Rossman says store credit cards can make sense if you plan to pay in full to avoid higher interest charges. But another consideration is how often the card is used. And he agrees that there can be negative consequences on credit ratings.
“Opening and closing too many credit card accounts can hurt your credit score, so be selective,” he said. “A 10% discount on a large purchase can make sense if you can avoid the interest, especially if you’re loyal to the store and will enjoy ongoing benefits. A 10% discount on a smaller purchase isn’t really worth it. “
But when all of these positive factors line up, myFICO says a store card can help consumers improve their credit score just like a traditional credit card. If the issuing bank reports the account to major credit bureaus, the account should appear on your credit reports.
The key, of course, is to make account payments on time each month.
