By Susan Johnston
If you're hitting the mall this holiday season, it's likely the cashier in at least one store will cheerfully ask if you want to apply for a store credit card and save 5 percent, 10 percent or, in some cases, 20 percent on your purchase.
"They're very tempting and easy to get because they're often marketed at the point of sale," says Ben Woolsey, director of marketing and consumer research at creditcards.com. "It's like junk food. It's very easy and compelling to get these cards, but if you get too many of them, it will degrade your credit."
Here's what you should know before applying for a store credit card.
1. Store credit cards often carry higher interest rates. The average credit card interest rate is about 15 percent, but many retail credit cards charge interest rates of 20 percent or more. If you pay off your balance in full each month, a high APR may not faze you. But if there's any chance of carrying a balance, you might want to think twice before signing up, says Anisha Sekar, vice president of credit and debt at the personal finance website nerdwallet.com.
2. Inquiries can impact your credit score. Each time you apply for credit, whether it's with a department store or a major credit card issuer, it can temporarily ding your credit score. Although the impact of each inquiry is typically five points or less, "you just don't want to be opening a bunch of new accounts if you're in the market for a major loan," says Liz Weston, personal finance columnist and author of the book "Your Credit Score." "If you're in the market for an auto loan or a mortgage, you don't want to lose a single point."
Applying for too many credit cards within a short time frame makes you look like a bigger credit risk, so don't apply for a credit card at every place you buy holiday gifts. Store cards often carry a low credit limit, so if you spend a lot, you'll have a high credit utilization ratio -- your balance versus your total available credit -- which can also lower your score.
3. Store credit cards aren't accepted everywhere. Most store credit cards report activity to all three credit bureaus, but they often aren't as widely accepted at retailers compared to regular cards and usually have lower limits, making them harder to use as a credit-building tool.
4. You might be better off with a general rewards credit card. When you choose a card that you can only swipe with one retailer, it means that card only earns rewards from one retailer, Sekar says. "There are so many cards out there that will give you pretty stellar rewards on a much broader base of retailers," she says. Some retailers give ongoing discounts to cardholders, but others offer only a one-time discount when you first open the card.
5. Some store credit cards do come with perks. If you're loyal to a certain brand and that brand has especially good incentives for opening a card, it might be worth considering a store credit card. "Sometimes they'll give 20 percent off your next purchase or give you additional bonuses," Sekar says. "Or there are flash deals where you get an additional 10 percent off that day, only available to cardholders. Sometimes they'll throw in free shipping." However, if you're not disciplined, all these perks can entice you to spend more than you intended, which is why retailers offer them in the first place. "Know yourself and don't trick yourself into thinking you're saving money by spending more money," Sekar says. "As great as the credit card rewards might be, keep a limit on your spending."
If you open a store credit card this holiday season, limit yourself to one or two at the most, and stay on top of the bills. "As with regular credit cards, the most important thing is to always pay your bill on time," Woolsey says. "Before adding a new store credit card, it might be worth looking in your purse or wallet if you have any you can get rid of."