Do’s and Don’ts of Using Store Credit Cards for Holiday Shopping

With the winter holidays fast approaching, you may be wondering how to maximize savings on gifts with store credit cards. And you may be considering applying for a store-brand credit card to take advantage of generous discounts, exclusive savings and other perks and loyalty rewards as you stock up on presents versus using a traditional rewards credit card to earn cash back. But before you sign up for a store credit card, there are a few caveats to consider, including potentially damaging your credit score and paying high interest rates.

With that in mind, if you’re gearing up for the shopping season, here are some guidelines for using store credit cards.

[See: 10 Ways to Avoid Credit Card Fraud.]

Do: Use a store credit card — or consider getting one — only if you regularly shop at the affiliated store. Because your spending habits can impact your credit report and credit score, it’s not a smart money move to get a store credit card for casual, occasional shopping at one particular store.

But it’s another story altogether if you frequent the store often and are a devoted consumer, says Julia Carlson, a financial advisor based out of Corvallis, Oregon, and founder of the Financial Freedom Wealth Management Group. “As a cardholder, you’re much more likely to receive additional perks such as special sales or exclusive coupons,” Carlson says.

For instance, the Target REDCard allows cardholders to take advantage of an extra 5 percent off all Target purchases online or in the store, and receive an extra 30 days for returns, plus free shipping, from its website. And with the JCPenney Rewards program, cardholders can get a point per every dollar spent, which apply toward special discounts and coupons.

It can be a smart idea to use a store credit card around the holidays, says Lyn Alden, the founder of Lyn Alden Investment Strategy in Atlantic City, New Jersey, which provides market research to individual investors and financial professionals. “If you have one or two stores that you buy from consistently throughout the year in large volumes, then a store card can make sense,” Alden says. “They often have very good rewards in exchange for being so limited.”

While the types of benefits and rewards available to cardholders differ by brand, keep in mind every little bit adds up when you’re spending a lot and buying in bulk around the holidays.

Don’t: Get a store credit card if you rarely shop there. If you have a store credit card that you rarely use, you might want to cancel it to avoid lowering your credit score, Carlson says. “This is due to having open credit accounts with no activity,” Carlson says. Also avoid other common missteps, such as missing a payment or making a late payment to prevent letting your credit score dip.

Don’t: Get too many store credit cards at once. “When you apply for new credit cards, your credit score often takes a hit. It’s not a good idea to apply for too many store cards,” Alden says. That’s because hard inquiries from issuers can stay on your credit report for a long time. Many hard inquiries can cause your credit score to drop by five to 10 points. While applying for one store-brand card around the holidays won’t greatly impact your credit score, if you apply for multiple cards, you may be jeopardizing your credit rating.

Also keep in mind, if you apply for multiple store credit cards, not only will your credit score likely drop temporarily; eventually, if you have a lot of store credit cards that you aren’t using, your score could remain lower than it otherwise would be. Conversely, if you have a lot of store credit cards and carry high balances on them, and you don’t pay them off in a timely manner, your credit score can also take a hit. To keep your credit score high, aim to have no more debt than 30 percent of your available credit.

[See: 10 Completely Careless Credit Card Mistakes You’re Making.]

Don’t: Overspend on a store credit card. During the holiday frenzy, it can be easy to spend more than you would typically when you have a store credit card and you don’t have to pay off a hefty bill right away. “This is especially true if you’re offered an incentive to spend a certain amount to reach a specific level or earn a discount,” Carlson says.

And if you overspend and end up carrying revolving credit, you’re going to wipe out the initial savings you earned on your store credit card. Store credit cards typically have some of the highest interest rates in the retail lending industry, Carlson says. Typically, a store credit card has an average interest rate that is 24.99 percent, while the national average interest rate for a credit card is around 16.9 percent. She advises only considering investing in a store-brand card if you can pay it off within the month.

Do: Use a store credit card if you have bad credit. While it may seem counterintuitive, if you have poor credit, you can use store-brand cards to your advantage.

“One good reason to use store credit cards is to build up your credit score,” says Priyanka Prakash, a senior writer at Fundera, a New York City-based company that specializes in finding financial solutions for businesses. “If you have a bad credit score, it can be difficult to qualify for traditional credit cards or personal loans. But stores will often be more lenient with credit standards because they want your business and for you to continue buying their products and services,” she says.

Still, if you have subpar credit, remember: You aren’t going to be offered a high credit limit, and you will be responsible for making each payment on time. So, if your goal is to raise your credit score while holiday shopping, carrying revolving credit won’t help get your finances back on track.

Do: Understand how store credit cards impact your credit score. “Store credit cards disproportionately are used by people with lower credit scores,” Alden says. “This is because they have lower credit limits and easy lending standards and are often marketed aggressively to consumers when they check out at a store.”

[See: 10 Money-Saving Websites to Check Before Shopping.]

If you’re debating getting a store credit card, you’ll want to carefully consider how it will affect your finances. Those with excellent credit often have credit cards with rewards that they can collect when shopping at any store, so they don’t have as much of a need for a store credit card. Ask yourself: Will I make my credit score worse, or better, by getting a store credit card? And if you have excellent credit already, tread carefully before applying for a store-brand card rather than a co-branded card, where you can take advantage of rewards such as points and perks wherever you shop.

More from U.S. News

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9 Ways to Save When Holiday Shopping With Credit Cards

10 Money-Saving Websites to Check Before Shopping

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