Store Credit Cards -- Enticing, But Not Always the Best Choice

We've all done it. While standing at a major retailer's register with an armload of purchases you are pitched an irresistible deal – sign up for the store's credit card and you can get an instant 10% discount on your purchase. And, if you are spending a sizable amount of money at someplace like the GAP, the idea of getting $20 or $30 off your purchase is pretty hard to resist.

But it probably is not such a good idea on many levels. First off, ask yourself, "Do I really need another credit card?" If the answer is no or even maybe, then it's probably best to politely decline the offer. Merely having too many of these credit inquiries on your credit report can wreak havoc with your credit score. Some experts have opined that each store card a person opens lowers the customer's credit score by 20 points, and the credit inquiries alone can shave off 5 points. Whether it's that damaging is a matter of conjecture, but it definitely is harmful to some degree if done too often.

Going beyond mere credit inquiries is the effect of having multiple, approved store credit cards in your wallet. The net effect can be quite detrimental. These types of store credit cards provide a way to run amok with purchasing power in very tempting environments whose sole purpose is to get you to spend, spend, spend. And, once you've racked up some serious balances, you will realize these credit cards carry some serious interest rates – typically 50% higher than general use credit cards like Visa and MasterCard.

Unlike general use credit cards, store credit cards can only be used with the retailer that issues the card and therefore have much less utility than cards issued by Visa, MasterCard, Discover or American Express.

Even if you never plan to use a store credit card and simply desire to earn the upfront 10% discount, it's probably a bad idea. By having additional lines of credit open on your credit report you will look inherently more risky to lenders. This type of "risk potential" can trigger all kinds of unpleasant consequences, like universal default pricing on your other credit card accounts. But how can that happen, even without carrying a balance or being late with a payment, you ask? Well, most cardholder agreements provide the bank issuers with the ability to impose penalty default pricing for almost any reason – even the hint of increased credit risk.

Bottom line, store credit cards may look like great deals on the surface. But, rest assured, they are mostly a great deal for the retailer rather than the consumer. Store credit cards drive increased sales, loyalty and profits for retailers, who have realized there is as much money to be made in selling credit as there is in selling their main retail items.

So, before signing up for that new store card at the checkout counter, consider your financial needs. If you truly need additional credit, you should shop around for a low interest rate credit card – even one that offers 0% introductory APR. And if it's rewards that you seek, consider one of the many compelling offers available from Chase, Citi, American Express or Discover Card. All of these issuers provide credit cards that allow consumers to earn a full 5% cash back on everyday items at grocery stores, drugstores and gasoline stations and 1% on all other purchases. And, these cards can be used at millions of location worldwide. When you stop and think, it's not difficult to see how general purpose credit cards offer greater value and utility than their private-label store card brethren.

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.