Put store credit cards on the naughty list

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The conversation at just about every major store you patronize this holiday season should go something like this:

“Would you like to save an extra 10 percent on your purchase today by applying for a store credit card?”

“No, thank you.”

Unfortunately, too many of these conversations will end with consumers pocketing a new card packed with high interest rates and low credit limits. That’s a holiday recipe for a battered credit score.

Yuck.

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New research from the credit bureau TransUnion found the number of new store credit card accounts doubles for certain retailers during the month of December. Online stores, discount retailers and jewelry stores see the biggest seasonal increases in card originations.

Department stores and merchants that specialize in clothing, electronics and furniture sales see significant spikes, as well.

Consumers are drawn to store cards by the immediate discounts some retailers offer, as well as deferred-interest promotions that allow cardholders to pay off their balance interest-free over 12 months or longer. TransUnion says there are 125.3 million such cards in circulation today, up 500,000 from December 2015.

Now, if you only use a modest amount of your available credit and pay your balances off in full every month, store credit cards can offer you some savings. But this is not every consumers’ experience.

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Higher interest

The average store credit card balance for consumers who don’t pay their bill in full each month is projected to increase to $1,768 this holiday season, up $43 from a year ago, according to TransUnion. By winter 2017, the average balance is estimated to top $1,800.

That can lead to big interest payments. The average annual percentage rate on store credit cards is 23.84 percent, a CreditCards.com study found. That’s well above the average rate for all credit cards, 16.28 percent, according to the most recent Bankrate survey of issuers.

If you carry a balance of $1,768 and make the minimum monthly payment on a typical store card, it will take you nearly 15 years to pay off the balance and cost you $2,813 in interest. That same balance would be retired five years sooner and $1,600 cheaper using a standard credit card that charges an average APR.

Low credit limits

Store credit cards also tend to have lower credit limits than that MasterCard or Visa you’re carrying in your wallet. This can have implications for your credit score.

Let’s say you put a $250 purchase on a store credit card that has a $600 credit limit. That means you’re using about 42 percent of your available credit, which is a higher utilization rate than most credit experts would recommend.

Since utilization is factored into your credit score, carrying this balance could knock your score down a bit, particularly if you carry this balance from one month to the next.

With these negatives in mind, you might be better off putting your holiday gifts on a rewards credit card.

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Mike Cetera

A savvy borrower always pays his debts. I'm a reporter at Bankrate, and I'll show you how.