Consumer Comeback Blog

4 Reasons Store Credit Cards Aren’t Worth the Quick Savings

Written by Jeffrey Trull

store-credit-cardsWhen checking out at retail stores, I often brace for the now-common question: “Would you like to sign up for our credit card and save 20% today?”

Store credit cards are no longer just for Macy’s and other department stores. Almost every retailer has them. While these cards come with a variety of benefits, the real hook for many of them: a sweet deal on that first purchase, but only when you apply for the card on the spot.

While you might save a few bucks, it’s likely not worth the other costs. Here’s why.

Inquiry penalties

When opening a new store credit card to take advantage of same-day savings, you’re faced with all the same pros and cons of opening a new credit card account. This includes inquiries, which influence to your credit score.

If you’re just after the one-time discount from opening an account and plan to close it soon after, there are still long-term consequences. A “hard inquiry” will appear on your credit report, likely resulting in a credit score drop. As Bankrate reports, you might also see a 10 to 30 point drop in your credit score just from one card. If you open several cards, your score may fall even further than that. These inquiries will impact your FICO score for a full year regardless of if your account is kept open that long.

The effects can be even more long-lasting, too. The record of this account will stay on your credit report for seven years from when you close the credit account, too.

High rates, low limits

Just about all store credit cards have two things in common: low credit limits combined with high interest rates. As the Mint Blog points out, these cards are really just sub-prime cards in disguise.

With just about any store card, you can expect to pay higher than 20% APR. Interest charges at these rates will quickly erase any savings from deals for opening the card.

These cards often have relatively low credit limits, too, which is a disadvantage to the cardholder. Many limits top out around $1,000, so you’ll need to be cautious about your balance and over-utilizing your credit, which impacts your credit score. If your first purchase comes in around $500, you’ll already be exceeding the recommended 30% utilization rate maximum.

No interest can be trouble later

You might be lured in by promises of zero interest charges for an introductory period, but these offers can be harmful when you don’t pay the bill in time. Some examples include Costco’s TrueEarnings American Express, which offers 0% interest for six months. Lowe’s credit card offers 0% financing perpetually on purchases of $299 or more, as long as it’s paid in full within six months.

Of course, the catch on these offers and others is the sky-high interest that kicks in later. For Costco’s TrueEarnings, the APR is about 15%. For the Lowe’s card, you’re looking at 24.99%. If you don’t completely pay your Lowe’s bill within six months, you’ll be stuck paying interest on your charge from the date of purchase.

Long-term costs not worth rewards

Everyone gets excited to hear they can save a few bucks on the spot. But the savings from opening a store credit card often aren’t that significant compared to other increased costs you might pay.

There’s no real way of knowing exactly how your credit will be impacted, but consider the consequences on your credit score and securing other loans. Losing points on your credit score just to get a small discount can cost you much more when your credit score drop turns into an auto or home loan horror story.

In reality, store credit cards might be worth it only if you’re a already regular shopper, won’t spend more because of the card, and you’ll save more in rewards versus another payment method.

Store credit cards are geared towards getting you to spend more money in that particular store, so rewards might be marginal if you’re using your branded credit card elsewhere. Plus, you may be bombarded by emails, mailings, and other offers from the retailer that encourage spending more money.

If you’re going to charge your purchases, you may just be better off with a standard credit card that offers decent rewards. A cash back card might get you a percentage back on all your purchases, not just the ones at that particular store. Before you jump at the card you’re being offered on the spot, do your homework and consider better offers.