Use store credit cards wisely, experts advise

Using credit card in a storeIt's an experience nearly all shoppers encounter: You pile your purchases up at the register and the cashier asks if you'll be paying with that store's credit card. If the answer is no, they'll ask in nearly the same breath if you'd like to open up an account. They might even offer you 15% off that day's purchases to get you to sign up.

While store cards have their place (as a newly-minted college grad with no work wardrobe to speak of, that 15% off was a big help when I signed up for a store card with the outlet branch of a big clothing chain), there are some important things to keep in mind. Store cards have some "critical differences" from non-retail cards, according to Adam Levin, chairman and co-founder of Credit.com. As this short video from CBS MoneyWatch points out, they do have some common pitfalls. First of all, they generally charge very high interest rates, often well over 20%.

In a telephone interview, Levin tells WalletPop that consumers have to be careful not to be seduced by the promise of a discount off their initial purchase. If you carry a balance, "that 10% to 15% you save could come back to haunt you," he warns. If you must carry a balance, find a non-retail card with the lowest APR for which you qualify.

Another quirk of store cards is that they generally have very low limits, sometimes only a few hundred dollars. Here's how this can affect your credit score: A sizable portion of your overall FICO score is determined by something the experts call your utilization ratio, which is how much of your available credit you've used. If you have a regular (non-store) card with a $5,000 limit and you spend $500, that's no big deal. However, if you have a store card with a $500 limit and you max it out, the FICO scoring formula makes you look like a risky customer, so your score takes a dive. What's more, Levin says, if you open several store cards in rapid succession, each of those will trigger an inquiry on your credit report, and multiple inquiries in a short period of time can pull down your score.

While store cards can be useful for a disciplined consumer -- they often offer rewards or coupons to cardholders -- the low limits and high interest rates are a substantial drawback. Bottom line: while store cards can be useful if you use them wisely, limit their use and don't ever carry a balance. Levin calls them "the gift that keeps on giving for the store." He adds, "If that balance gets away from you, that's when it becomes a killer."

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