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Everyone who has gone into a retail store has heard the question: “Would you like to save 20% off your purchases today?” We know without asking what that means, you have to apply for the store's credit card. The question prompts a split-second decision, but applying for a store card warrants some forethought. A new account impacts your credit score and opens up another avenue to debt. The split-second decision can have repercussions long after the items you bought for 20% off are gone. Store cards are known to have advantages and disadvantages that general purpose cards don't have; consider the following pros and cons before you apply for a store card. Pros: Some store card programs offer special coupons to cardholders. These, however, can often be obtained by simply signing-up for the store’s newsletter. Ask a sales associate if there's a mailing list. You might find that you don't need the store's card. Store cards that bear an American Express, Discover, MasterCard, or Visa logo (also known as “co-branded cards”) can be used at any establishment that accepts that co-brand. On top of their flexibility, these co-branded cards can have rewards programs that go beyond in-store perks, such as earning points for airfare and merchandise, or earning cash back for any purchases inside or outside the store. It’s important to compare the card program with those of other rewards cards to make sure you're getting the maximum amount of perks for your points. Helps build credit history. Those looking to establish or rebuild a credit history may find a friend in store cards. These retail cards can be used to build credit as long as no balance or not much of a balance is held on the card. Co-branded cards, however, may be harder to qualify for because the issuers typically price for risk -meaning that people with lower credit scores may get higher interest rates, and vice versa. The long-term effect of responsibly handling a store card can add points to your credit score. Using these cards sparingly and keeping statement balances low can reduce your debt-to-credit limit ratio, which makes up approximately 30 percent of your credit score. Cons: High interest rates. Store cards tend to have higher annual percentage rates (APRs) than other cards – often around 20% APR or more. Co-branded cards tend to offer a range of rates depending on the applicant’s credit score. Regular store cards, or private-label cards, usually offer a flat rate no matter what your credit score is. If you tend to revolve balances, steer clear of regular store cards. Paying 20% APR or more in interest will soon offset the money saved from using the discounts associated with the card. Low credit limits. Most store cards have lower credit limits – often only around $1,000. With a credit limit this low, it's easy to run up a high balance and hurt your credit score. A lower credit score could even trigger other card issuers to increase your interest rate or reduce your credit limit. Co-branded cards may offer more generous credit limits, depending on the applicant's credit history. It’s best to keep statement balances on all your cards under 30% of the credit limit. For example, if your store card has a $500 credit limit, try to keep statement balances under $150. Lowers your credit score. An application for a new credit card triggers a hard inquiry (a record of any access of your credit report) on your credit report, which can impact your credit score. The damage could deduct 10 to 30 points off your credit score. People who sign-up for multiple cards can see a bigger drop – maybe even 30 points. Those with a lot of store cards tend to be riskier borrowers and the FICO scoring model takes those inquiries into account. An inquiry will stay on your credit report even if you never activate the card. Inquiries can remain on your credit report for two years, though the FICO scoring model only looks at those from the last 12 months. Closing recently opened store accounts won't make them disappear. The account will stay on your credit report for seven years; it doesn't instantly go away when you close it. Applying for a new card also lowers the average age of your accounts, which affects the length of your credit history – a factor that makes up 15% of your FICO score. To see what a new application would do your score, use BankRate.com’s free FICO score estimator. The reduction in credit score can come back to haunt people who apply for loans the following year. People with borderline-excellent FICO scores of 750 or 760, might get bumped down to the next best rate – all because that store card application cost them points they couldn't afford to lose. Another spending temptation. Consider your habits. If coupons for items you want send you rushing to the store, store cards might get you into a lot of debt. You’ll most likely begin receiving enticing ads and shopping promotions on a regular basis – undisciplined shoppers must be wary. Should you apply? If you plan on getting a loan in the next year, you might want to avoid taking on any new store credit cards. If you pay your balances every month and could take advantage of the promotions without overspending, then you might benefit from a store card. You also want to take into account how the card stacks up against general-purpose credit cards. General Electric Credit Union offers some of the best credit cards around with rates lower than the industry average. To learn more about our credit card programs, please click here. You may also contact us at: 513.243.4328 / 800.542.7093 or by email at: memberservices@gecreditunion.org.Sources:
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