credit cards

Store credit card: good deal?

Highlights
  • A new credit card account will negatively affect credit score.
  • Some cards offer extra perks, like special shopping days.
  • Most store cards have interest rates in the 20 percent range.

Everyone who has gone into a retail store has heard the question: Would you like to save 20 percent off your purchases today? We know without asking the cashier what that means: You have to apply for the store's credit card.

The question prompts a split-second decision, but applying for a store credit card warrants some forethought. A new account impacts your credit score and opens up another avenue to debt. Store cards in particular are known to have advantages and disadvantages that general purpose cards don't have.

Consider the following pros and cons before you apply for a store card.

Store cards
ProsCons
Promotions, discounts and other perks.High interest rates.
Helps build credit score.Low credit limits.
Lowers credit score.
Another spending temptation.

Pros

Promotions, discounts and other perks. Besides the initial discount, some cards offer continuing discounts, exclusive shopping days and other rewards that would benefit frequent shoppers. For instance, Macy's credit cards offer returns without a receipt, and depending on the card type, goodies such as free gift wrapping, basic alterations and $25 gift certificates. Nordstrom's retail credit card gives its cardholders $20 for every 2,000 rewards points earned.

Some store card programs offer special coupons to cardholders. "Yet, many of these promotions and sales can simply be had by signing up for the store's e-mail newsletter," says Fatima Mehdikarimi, founder of ShoppingQueen.com. Ask a sales associate if there's a mailing list. You might find that you don't need the store's card.

Store cards that bear an American Express, Discover, MasterCard or Visa logo can be used at any establishment that accepts that co-brand. On top of their flexibility, these co-branded cards can have rewards programs that go beyond in-store perks. For instance, the Sears Gold MasterCard allows you to redeem points on round-trip airline tickets, among other items. The TrueEarnings Card from Costco and American Express offers cash back for purchases, including 3 percent for gas and restaurants, 2 percent for travel and 1 percent for everywhere else.

Make sure to compare the card program with those of other rewards cards to make sure you're getting the maximum amount of perks for your points.

Helps build credit history. Folks looking to establish or rebuild a credit history may find a friend in store cards. Retail store card issuers "are historically known for being more lenient when it comes to the credit profile of the consumer that they'll approve for a card," says Curtis Arnold, founder of CardRatings.com and author of "How You Can Profit from Credit Cards." In other words, they are more likely to approve people with lower credit scores.

"Retail cards can be great way to help build your credit, assuming you don't carry a balance or much of a balance," Arnold says. He contends they're much cheaper to use than "fee harvester cards" meant for subprime borrowers. The latter zap people with numerous fees that retail cards don't charge.

Co-branded store cards, however, are harder to qualify for because the issuers typically price for risk -- meaning that people with higher credit scores will get lower interest rates.

The long-term effect of handling a store card well can add points to your credit score. Using these cards sparingly and keeping statement balances low can reduce your debt-to-credit limit ratio, which makes up 30 percent of your credit score.

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Cons

High interest rates. Store cards tend to have APRs of 20 percent or more, says Shyam Krishnan, an industry analyst with Frost & Sullivan, a business research and consulting firm.

Co-branded store cards tend to offer a range of rates. Regular store cards, or private-label cards usually offer a flat rate no matter what your credit score is.

If you tend to revolve balances, steer clear of regular store cards. Paying 20 percent or more in interest will soon offset money saved from using discounts. For low-interest credit cards, check Bankrate.com.

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