For many consumers, a trip to the mall is fun, gratifying and carefree - a well-deserved stress reliever. However, danger lurks at the checkout counter.
"Would you like to open a credit card with us today? You'll save 15 percent on your purchase," the clerk says with a smile. Such offers sound tempting, but smart shoppers should consider taking the application home and scrutinizing the terms and conditions before deciding whether to apply for the credit card. For a number of consumers, acquiring a store credit card can put their finances - and their credit score - at risk.
With the adoption of store-branded credit cards across major retailers, such as Amazon, Target and Walmart, consumers frequently have the option to open a store credit card. Sometimes, repeated proposals push shoppers to bite. Other shoppers just want to snag a deal and sign and submit the application on the spot - taking little or no time to review the offer.
Beverly Harzog, an independent credit card expert and author of the forthcoming book "Confessions of a Credit Junkie," says it's relatively easy to qualify for a store credit card. Store credit card offers tend to have a lower credit limit and a higher annual percentage rate than a standard credit card, enabling stores to cast a wide net for attracting prospective credit card users.
Currently, the average interest rate for a credit card is 14.32 percent, according to LowCards.com's weekly credit card rate report. Interest percentage rates on store credit cards typically run in the low- to mid-20s, says John Ulzheimer, president of consumer education at SmartCredit.com.
Harzog says these interest rates - while unfriendly - don't automatically rule out store credit cards as being a sound way for people to start building good credit history. "The high interest rates are risky, but for someone who's responsible, a store card can be a great way to start using credit," she says. Her advice: Use the card within reason (maxing it out can hurt one's credit score), and pay it off in full and on time each month.
Alternatives for consumers looking to build credit include using a secured credit card, which has a fixed credit limit and is linked to a savings account. Some parents decide to make their child an authorized user on their credit card, while others co-sign to help their child get their own credit card.
Although it can be a viable option to establish credit history, Gerri Detweiler, director of consumer education at Credit.com, warns shoppers against impulsively signing up for a store credit card. "A credit card has a long-term impact on your credit score," she says. "You're not just looking at, 'How much are they giving me today when I open the account?' - you're looking at what kind of ongoing benefits you're getting and whether you'll use them."
In the short term, a credit card application triggers a hard credit inquiry, which causes your credit score to take a slight hit. Applying for multiple credit cards all at once can significantly damage your credit score. Some holiday shoppers experience this when they bounce from store to store, applying for credit cards at each one to save money on that day's purchase.
For large purchases, however, a single day's savings could make getting a store credit card worthwhile. Someone who plans to spend $30,000 remodeling a kitchen, for example, may be able to save around $150 or receive special financing (zero percent interest if the purchase is paid in full within six months) by opening a credit card at Lowe's. Ulzheimer says home improvement stores tend to offer higher credit limits than other retailers.
[Read: Confessions of Former Shopaholics.]
A number of retailers give exclusive deals to cardholders, including special sales events. Target offers its Credit REDcard customers 5 percent off every purchase and free shipping at Target.com. If you're a frequent shopper at a store that offers a juicy rewards program, Harzog says a store credit card could save you money.
Moreover, co-branded cards prove beneficial for some consumers for other reasons. Janna Herron, credit card analyst at Bankrate.com, points to the TrueEarnings Card from Costco and American Express as a card that offers an attractive rewards plan, including 3 percent cash back on gas up to $4,000 per year in purchases (1 percent thereafter) and 2 percent cash back at restaurants in the United States.
However, Ulzheimer says consumers with good credit (a Fico score in the mid-700s or above) can typically qualify for a better rewards credit card. "Even using a general use rewards credit card is almost always going to be a better move than using a retail store credit card," he says. "The limits are higher, thus avoiding the issue of over-leveraging the retail card, and the rates will likely be considerably lower, thus making the debt less expensive to carry." But shoppers who have too many rewards credit cards may run into trouble.
[See: 10 Signs You Shop Too Much.]
"You should have a good grasp of what the rewards are for each card in your wallet or your purse," says credit expert Bill Hardekopf, CEO of LowCards.com. "It's your responsibility to know that. If you don't, you're not making the best use of your money." When you make a purchase you can use a mobile app like Glyph (for iPhones), which tells you what credit card to use to earn the best rewards.
Take advantage of free rewards. Whether or not you opt for a store credit card, you can maximize your savings by using a retailer's rewards card. Many major retailers offer one for free like Best Buy, which rewards frequent shoppers with loyalty points that can add up to significant store credit.
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