Store credit cards often sound like amazing deals, thanks primarily to aggressive sales clerks and overzealous PA announcements. They often sound too good to be true. And the reality is that store credit cards tend to have higher interest rates and not-so-great rewards programs after you’ve taken advantage of the introductory offer they hook you with. They also tend not to carry any of the usual benefits and protections of standard credit cards.
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Even with all of these flaws, consumer still sign up for them because of flashy discounts and one-time promotions. So if you find yourself being talked into applying for store credit cards while you’re out shopping, know that savvy enough shoppers can use these cards to raise their credit ratings and save money.
Don’t get sold—do your research
It’s important that you don’t fall into the pressure of applying for a store credit card, especially at a store where you rarely shop. Even though it offers 10 percent off of your purchase doesn’t mean that it will actually offer long-term savings. If you’re thinking about getting a credit card from a store you shop at frequently, make sure to do some research first and and find out which store cards give you the best rewards.
A great example is the Kohl’s credit card, which offers 15 to 30 percent off discount coupons 12 times annually. They also offer pick-a-day savings six times annually when you spend $600 within a year. Then the Best Buy credit card has 0 percent interest on big-ticket products, and when you use their credit card with the Best Buy rewards credit card, you can get additional bonus points. With the Macy’s credit card, you get to save on the day you apply and the following day. So pick a day when you know you’ll be shopping for two days, like right before a big sale.
Once you’ve decided which card you’d like to apply for, make sure that you do it on a day that you’ll be making a big purchase. This will allow you to save more money with the initial discount. Be aware, however, that a purchase that’s out of your budget range and that you won’t be able to pay back at the end of the billing month could end up costing you more in interest than you earned in discounts.
If you’re worried about the 22 percent interest rate on your store card, stick to purchases that you’re able to pay off immediately with the cash you have on hand. You may even be able to pay off your charges right there at the register. This will prevent you from missing your payment date and having to pay up those crazy interest rates.
Stick to your budget
A lot of the 0 percent intro APR credit cards that are offered by stores like Home Depot may seem like a great idea, especially for big-ticket products. But if you’re unable to pay off the balance before the intro rate expires, you’ll be stuck with more interest than you imagined. With these store cards, you are charged interest retroactively during the months when you thought you weren’t accruing any.
Deal with this by setting budgets for your purchases. Say you just purchased a home theater system that cost $2,400 after tax, installation and warranties. And it came with no interest for a year. Then you have to make sure that you’re able to pay $200 monthly towards that balance. If you also have “no payments,” then you can keep that money in your bank account, set aside where it won’t be touched until you use it to pay off the purchase.
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Improve your credit with store cards
Every time you apply for a credit card, your FICO score takes a 3 to 5 point hit since credit checks count against your credit score. When you open the account, another 10 points could be deducted. But if you play your cards right, you can use the store card to raise your score. Here are some things to keep in mind:
- Credit ratings consider gas and retail credit cards as diverse revolving credit. About 10 percent of your credit rating is made up of your “credit mix.”
- As long as you don’t keep a balance on your store credit card, you will have a lower credit utilization ratio, which makes up 30 percent of your credit rating.
- Being on time with your monthly payments, and making full payments, will help your payment history, which FICO considers for 35 percent of your score.
- Keeping your credit card account open for a long time helps as well because length of credit history is 15 percent of your score. So if you are wise about opening store credit card accounts, you can both save money and help your credit history. But if you’re not careful, it’s too easy to end up costing yourself money and hurting your credit.
Tim Chen is founder and CEO of NerdWallet.com, a site that helps consumers become experts on comparing low APR credit card offers.