There are a lot of good and bad aspects associated with a store credit card. The good things are almost always accompanied by a negative. The card issuers and the stores themselves are in business to make money after all and they are targeting you. Here are a few store card benefits and the negatives that come with them.
A Store Discount
One of the biggest incentives that you will find to applying for a card is an instant discount on your purchase, typically 10 percent. This is particularly appealing around the holiday season when your totals at checkout are higher. Who wouldn’t want to save an easy 20 or 30 dollars just for submitting an application?
Besides an immediate discount, many cards also come with a permanent discount on purchases. One example is the Target Red Card which gives its users 5 percent off of every purchase. A good deal if you shop there regularly.
So what’s the problem?
The problem with a discount is that it is just a ploy to get you to spend more. That retailer is not offering you a discount just to be nice. They know that getting you into that card will increase the likelihood of you spending more money at their store. This is a very effective strategy, especially around the holiday season. You might have planned to spend 300 dollars today but with that new card, a 1000 dollar shopping spree may be tempting.
Deferred interest, is there anything sweeter. One of the greatest benefits of store cards is a term with 0 percent interest. It could be 6 months, 12 months or even longer. When you consider that most store card interest rates hover around 24.9 percent, this offers a significant savings. It can allow you to get the products that you want and fit them into your budget with low monthly payments.
In addition to saving money on interest, it is also like free money if you factor in inflation. If you have 0 percent interest for 3 years and finance 2000 dollars, the money you borrow now is worth more than the money that you pay it back with. 2000 dollars now is worth more than 2000 dollars in three years.
So what’s the problem?
There are two main problems when it comes to 0 percent interest periods.
The first is that many people do not realize is that it is not an interest free period, it is a deferred interest period. Sounds like two similar things but there is a huge difference between the two.
While you are not being charged the interest, it is still accruing. The card company is keeping track of the deferred interest and if you fail to pay off your finance agreement in the time specified, they will charge you every penny of it. Considering that store credit cards often carry annual rates of over 24.9 percent, this can be a hefty amount of interest.
Another problem with interest free periods is that they encourage you to spend more than you otherwise would have. You might have been shopping for a 500 dollar television but once you realize that you can purchase interest free for 18 months, you might be inclined to go for that 2000 dollar dream screen. Sure, you might successfully complete your interest free contract but you will still have spent more money than you were budgeting for.
High Credit Limits
In many cases, you can qualify for more money with a store card than you would with a Visa, Master Card or other major network card. You might, for example, be able to qualify for 5000 dollars or more in store credit at a single store when your credit would not support such a limit with a major card.
Having a high credit card limit is great, everyone likes to know that they have cash on hand if they need it. The additional credit might even lower your debt credit utilization ration and that can increase your credit score.
So what’s the problem?
The problem is twofold.
First, the high credit limit can encourage you to spend more than you otherwise would have. Unless you are financially disciplined, having extra credit available can encourage you to buy more than you otherwise would have and take on unneeded debt. Receiving high credit limits without the high credit score can give you access to money that you are not ready for. When you have a high credit score, you are usually financially responsible enough to handle the power.
Second, is the fact that all of this new buying power comes at just one location. You might have a couple thousand dollars in buying power but you have to use it in just one place. That takes away your ability to price shop. You are a captive buyer and the price of merchandise is just what it is, take it or leave it.
As you can see, there are a lot of benefits that come with store cards but all of them come with some pretty big pitfalls. Every thing about a store credit card is designed to get more money out of you and make the store a profit.
That being said, if you are financially responsible and disciplined, you can reap some benefits.
- Take the discount at checkout and then cancel the new card. Keep in mind though that an inquiry can ding your credit a few points and the ding can last up to a year.
- If offered an interest free period take the free money but pay it off on time. Divide the amount owed by the monthly installments in the plan. Do not count on the store card minimum payment being enough to pay off the balance in time.
- When the extra credit could help your score, take the credit and don’t use the card. Take the credit score increase and cut up the card so that you will not use it.