Department Store Credit Cards: What You Should Know

When you’re about to make a significant purchase, the offer, “would you like to save 20 percent on your purchase today?” can be very tempting. Of course we all know what this means: opening a store credit card. Is the savings on your purchase worth the cost of the credit card? Here are some things to consider when you’re faced with the option of opening a department store credit card:

They have higher interest rates

Store credit cards have an average interest rate of 23 percent, compared to 15 percent for other credit cards. If you’re not one to pay off the balance of your credit cards each month then your purchases are actually costing you more.

If you were to make the monthly payments on a $1000 balance from a store credit card, and the interest rate were 23 percent, you would end up paying $838 in interest, assuming you were making only the minimum payments. This makes any potential discount offered by the store not worth it.

More temptation to spend

Several store cards have terms that require you to spend a minimum amount in the store before you receive a rebate or incentive. This may tempt you to spend more than you usually would just to qualify for the savings. While you may get 5 percent cash back on that $500, you still spent $500 more than you normally would have.

Only useful if used

If you opt for a card from a big retailer, such as Walmart or Target, you may see some benefits from having the store credit card. If you are able to pay off the balance immediately, you can improve your credit by having a small credit utilization ratio, as well as reap the rewards offered from the card. Here are some other ways to get the most out of your credit card rewards.

Additionally, store credit cards are usually easier to be approved for than regular credit cards. For individuals looking to improve their credit but not qualified for other credit cards, store credit cards may be a good option if it will be used responsibly.

Impacts your credit score

Applying for a store credit card requires a hard pull of your credit score, which can potentially ding it by 10-30 points. If you apply for multiple cards you could see even more points deducted as it appears you are desperate for credit. Keep this in mind and shop smart for credit cards so you don’t experience multiple penalties.