It’s a question every shopper has had to ask themselves: Do I want to apply for a store credit card?
If you don’t ask yourself that question, the associates at the register will. If you aren’t ready with a standard, “no thanks,” you may say “yes,” or waffle about it for a moment.
So what should you say? “No” every time? “Yes,” if it seems like a great deal? Consider your answer carefully and remember the following.
[See: 12 Simple Ways to Raise Your Credit Score.]
It’s easy to damage your credit with store credit cards. The reason you should be cautious about opening up these accounts is that the credit limits are generally low, says John Ganotis, co-founder of Credit Card Insider, a credit card comparison and information site.
It may sound good — a low credit limit means you can’t get into too much debt with a store, right? However, the problem is the low credit limit, Ganotis says.
“The percentage of your credit limits being used is a big factor in credit scores, and a lower percentage is generally better,” he says.
In other words, if you have a MasterCard or Visa with a $3,000 limit, and you’re carrying a $300 balance, you look pretty responsible to a lender. You’re only borrowing a little money, and to the lender, you probably seem like someone who can handle another loan.
If you have a store credit card with a $300 limit, and you’re carrying a $300 balance, you’re going to look like someone who maxes out their credit cards. To the lender, you seem like, well, a flake.
[See: Best Credit Cards: Find the Right Card for You.]
It’s easy to build your credit with store credit cards. The inverse is true, too, says MaryAnn Monforte, assistant professor of accounting practice for the Martin J. Whitman School of Management at Syracuse University.
“Store branded credit cards are a great way to establish good credit. They are typically easier to apply for and get approved, even with a less-than-perfect credit score,” she says.
But proceed carefully, Monforte warns.
“Too much open credit is not good for your credit score. Opening cards at every place you shop, even with low credit limits, adds up,” she says.
And there’s another negative that can tear down your credit score as fast as you try to build it up. Store credit cards, Monforte says, serve as an “enticement to spend money when you don’t have it.”
Watch out! The zero financing could be a trap. Some stores will offer zero financing on purchases for six months or perhaps a year or longer. It can be an attractive way of gaining more time to pay back a loan.
“If you have a history of always paying your credit card bills off in full and on time, the interest rate becomes irrelevant and there are good deals to be had,” says Adam Jusko, founder and CEO of CreditCardCatalog.com, a card comparison and news site.
But woe is you, if you don’t pay the loan back within the promotional period.
“You end up paying all of the interest that would have accrued from the date of purchase — as if the zero percent offer had never existed,” Jusko says.
He adds: “And, of course, the interest rate you’ll pay is north of 20 percent on almost every card. Reading the fine print is essential with these offers.”
You need to be particularly wary about taking these offers if you have bad credit and a track record of not paying these zero financing purchases off. For instance, a 2013 study from the Consumer Financial Protection Bureau showed that 43 percent of borrowers with subprime credit scores who take deferred interest payment offers end up being charged retroactive interest in a lump sum.
[See: 9 Scary Things Consumers Do With Their Money.]
Benefits matter more than your loyalty to the store. “The best time to sign up for a retail credit card is when its benefits outweigh its costs,” says Oraynab Jwayyed, a personal money management consultant in Oklahoma City who owns Business Interludes, LLC, which helps women organize their financial lives.
If you’re a habitual shopper at the store, and the rewards or points are high, and you have a good history of paying off your credit cards every month, then you probably have a good argument for applying, Jwayyed says.
But don’t let your loyalty and the rewards package dislodge your common sense. Jwayyed points out that if you have a major credit card with benefits, it may trump the store card.
If that’s the case, “it’s best to stick to that one,” she says.
The store credit card isn’t being offered as a favor. The company executives do want to make you happy, and so it isn’t as if they’ve designed a financial tool guaranteed to put you in the poor house. The hope is that you’ll use the credit card responsibly, over and over, and visit that store more than the competition.
If you believe you can do that, getting the store credit card may be a smart move.
But one way or another, that credit card is going to make the store money, whether you use it responsibly or not.
That’s why if an associate asks you if you want to apply for the card, the answer should always be “no,” says Robert Palmer, the Florida-based host of the personal finance radio show, “Saving Thousands,” which airs on numerous stations primarily in the South.
“Never sign up for a store credit card at the register,” Palmer says. Consumers are asked to sign up for a credit card while they’re paying for an item because “[the stores] like to, in a sense, force you into an immediate decision while masking the high interest rates and fees with 20 percent off your current purchase,” he adds.
That doesn’t mean you can’t open one later, but postpone until you can think about it and read that fine print, Palmer says.
Because these companies know exactly what they’re doing. “They completely understand how most consumers operate. We accept the immediate good deal while putting off paying the consequences later,” he says.
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5 Things You Need to Know About Store Credit Cards originally appeared on usnews.com
