Monday, October 13, 2008

Be Cautious About Store Credit Cards

You are in line at your favorite retailer to get your purchases rung up, with a collection of all kinds of items you can't wait to take home. When you step up to the register, the clerk asks you if you'd like to save 10% off your purchase by signing up for a store credit card. You quickly do the math in your head and realize you could save a quite a bit of money by accepting the offer. And, by signing up, the store credit card also promises to provide special announcements regarding upcoming sales and the chance to earn other rewards. It sounds like too good of a deal to pass up, so you get ready to start filling out that credit card application. However, regardless of the instant savings involved, this might not be in your best long term interest.

Industry estimates show that the market for proprietary or private-label credit cards surpasses $100 billion annually. Obviously, lots of consumers have them. But is getting a store credit card really a smart move? For most shoppers, the answer is "no."

One of the main reasons a store credit card is not the best idea is that these forms of plastic, offered by many major retailers to customers through either their own financing arm or through third-party issuers, carry a very high interest rate. While the average bank credit card charges an APR in the neighborhood of 13% or 14%, many store credit cards' interest rates exceed 20%. If you revolve a balance on your credit card, that initial 10% savings on a purchase can get eaten up very fast due to the hefty interest you will end up paying.

Still, store credit card fans argue that since these credit cards carry higher minimum monthly payments than bank credit cards, balances get cut much more quickly. They add that retailers set the minimum payments at a higher level than what banks require, since they know a debt-free consumer is likely to do more shopping.

Another problem with store credit cards comes in the threat posed to your credit score. In the way that credit bureaus calculate your credit score, the formulas used with store credit cards differ from those used with bank issued credit cards. With the average U.S. consumer carrying four or five credit cards, additional store credit cards can make you look like a bigger risk to credit agencies -- resulting in a lower credit score for you. A lower credit score, in turn, can impact the interest rates you pay for other borrowing.

Although having a diverse mix of credit within your credit history can potentially aid your score, too many lines of open credit can signal danger to a lender, who may worry about the consumer's potential to incur additional debt.

Meanwhile, store credit cards are often forgotten by consumers who only complete applications in exchange for initial burst of savings. Many of the 500 million or so store credit cards in circulation are taken out during the holidays. While the store credit card may not be used, the open account will still appear as a line of revolving credit on the consumer's credit report.

Also, some consumers may not like having their personal information shared with other companies or placed on marketing mailing lists. Stores such as retailing giant Wal-Mart routinely provide data to third parties looking to offer you special promotions or services. While buyers' personal information and buying habits represent another source of revenue to companies, it may be an annoyance to consumers who are already flooded with offers they don't need or want.

So, in the end, consumers looking to get something back when they shop will likely get more out of signing up for a reward credit card. An instant 10% savings is not worth the problems a store credit card might cause.

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