Store Credit Cards: Pros & Cons

You’ve been saving up for months for that perfect gift for your new husband: an extra wide curved monitor he can use for work. You have the perfect spot for it in your makeshift home office, and you know how much frustration it would save him during big, complicated projects.

You’ve secretly saved up almost all the money you need, and you’ve been watching sales like a hawk. But as you’re browsing on social media, you see an ad for that exact monitor with “20% OFF” in big, bold text. You click on the ad and soon discover that you really can get 20% off—a deal worth $240—but you would have to open a store credit card to do it.

It can be tricky to figure out whether the deal is a good one, especially when you’re trying to make someone’s holiday season perfect. To help you out, we put together some pros and cons of store credit cards during the holidays.

Pros

Store credit cards allow you to save on big ticket items

Saving money at the checkout counter (or the checkout screen) is the biggest benefit of these cards, and it can be very tempting. Some store cards allow 5% off or more throughout the store and others offer even bigger percentages in conjunction with sales or particular items. This can mean substantial savings, especially for big purchases.

You may qualify for store credit if your score is in the “fair” range

Store credit cards are often easier to get than other kinds of loans or credit cards. If your credit is in the fair range, meaning at least 640, you will likely qualify for most store cards.

Most store cards have a $0 annual fee

Another benefit of store cards is that there are usually no annual fees. In addition, many let you spend money without paying interest for a certain length of time or introductory period. This can mean you pay nothing to borrow the money, at least for a little while.

Store cards could help you build credit

If you limit the number of store credit cards you have and pay all your bills on time, store credit cards may be a way to build or establish credit history. Store credit cards may also be part of a healthy mix of credit types, and both these factors are part of your FICO score. To make these cards work in your favor, most credit experts recommend paying off your total bill in full each month or each time you make a purchase.

Cons

Deferred interest can mean you pay much more for purchases than they’re worth

First, let’s define deferred interest. It is interest that is assessed starting the minute you make a purchase, but deferred for an introductory period. If you have any balance when that introductory period ends, the entire interest may show up on your bill all at once.

If you buy a curved monitor for $1,200 with a store credit card, for example, you may have a 60-day introductory period with a 24.5% interest rate and $0 annual fee. If you pay off the $960 within 60 days, you’re scot-free! But if you have any balance remaining after those 60 days, you could be charged the full 24.5% interest dating back to the time you made the purchase, plus interest on the new total.

The difference could eat up your 20% off deal pretty quickly. You could end up paying far more for the monitor than it was worth.

Store credit cards usually have low limits

It’s also important to know that most store cards have pretty low spending limits. This can be annoying, but it can also harm your credit score because it makes it look like you’re using too much of your available credit and living beyond your means.

The idea is referred to as a credit utilization ratio. If yours is too high (experts recommend having no more than 30%), your score will drop and you may not qualify for the best possible rates on things like home loans and auto loans.

Store credit cards usually have high APRs

It’s true that most store cards don’t have annual fees, but interest rates on these cards are typically higher than for other types of credit. That means your annual percentage rate (APR) may be much higher on store cards. Any savings you get at the checkout counter could be eaten up by these high rates in very short order.

Many store cards work only at that store

This one might be kind of obvious, but it’s still worth mentioning. If you get a store card, you can only use that line of credit in that store or group of stores. Consider carefully whether it’s worth it to you to open a line of credit when purchase options may be quite limited.

Each new card shows a hard inquiry on your credit report

This is another way store cards can hurt your credit in the long run. Every card you open means a new hit on your credit report. Just like having a poor mix of credit or a poor credit utilization ratio, these hits can lower your score in a hurry.

Alternative financing options

Every financial situation is different, and the pros and cons we’ve listed may be more or less important to you depending on your financial goals. If you are just hoping to save 20% on a monitor and have the $960 to pay off the balance immediately, this offer could be a good way to save money.

But if you’re hoping to establish credit history, think twice before using store cards to finance big-ticket purchases. This is especially true if you’re hoping to finance a new car or buy a home in the next year.

Instead of opening a store card at the cash register or checkout screen this year, consider:

Network credit cards: Cards bearing the names Visa, Mastercard, American Express, or Discover are widely available from respected financial institutions and may offer better deals than store cards. They can be used almost anywhere and don’t come with the risk of deferred interest.

Secured credit cards: These cards are also widely available and allow you to spend up to a certain amount of money, usually equal to a deposit you put down when you open the line of credit. Paying monthly bills on time may help build your credit quickly.

Budgeting software: Digital tools can help you put aside a certain dollar amount each month, and you may be able to use them for free through your bank or credit union. Simply enter the final price of the item you want, decide how long you want to save up to reach that total, and budget accordingly.

Sales and coupons: Stores have a lot of ways to get you to buy things, and offering store credit cards is only one of them. Watch for post-holiday sales and coupons for particular items as a way to pay less without negatively impacting your credit.

The holidays are a joyful time, and giving thoughtful, heartfelt gifts is one of the best parts of the season. But if you can give generously while protecting your own financial future, everyone will benefit.

If you’re thinking about buying a home this season or in the year to come, we would love to take a look at your finances and help you compare home loan options. Find a licensed Loan Officer in your area to get started.

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