You pause. 15 percent. That's a pretty good deal. Here you were, thinking you were going to pay full price for your items. Now, you've been given the option to take a solid chunk off your bill. What will you do?
Okay, signing up for a store rewards card program isn't the most important decision you'll ever make, but it deserves more than just a split-second thought. There's a lot more that goes into store credit cards than just saving on signing day. Make sure you know the facts.
There are usually only two types of store cards.
A store-branded card applies only to a specific store and it comes with special perks for shopping there. A co-branded card can usually be used at any retailer. The store sponsors the card, which is produced by one of the major credit card companies. Like a store-branded card, you'll receive points and rewards for shopping at the retailer sponsoring the card. Unlike the store-branded card, you can use it anywhere.
Here's the good news.
Store cards are a great way to establish or build your credit score. If you're having a hard time getting approved for a traditional line of credit, this is your way in. Applying for a store-branded card means you won't be able to overspend at a lot of places and let things get out of control, either.
The rewards aren't too bad, either. A lot of stores include member-exclusive shopping events, discount rates, and more for their cardholders. As long as you pay your bills on time, this is a dream come true. Right?
Not always.
These cards do have their downsides. First of all, they generally have a higher annual percentage rate (APR). The average APR of the largest U.S. retailer's store card is 23.23 percent. The national average for a fixed-rate card is 13 percent, and the average for a variable rate card is 15.6 percent [1]. So, while these cards may be convenient, you can expect to pay more interest.
Even if your sole purpose of signing up for card is to build your credit score, you're still not off the hook. Signing up for a lot of cards at once may actually hurt your score. According to credit scoring expert Barry Paperno, opening multiple cards within a short period will probably have a negative immediate effect. In the long run, if you maintain your payments, it will probably help you out [2].
However, credit utilization is what really matters with store cards. Credit utilization is the ratio of how much of your credit you use versus your credit limit. That means if you spend $200 at a store of your $1000 limit, you have a credit utilization of 20 percent. Credit utilization accounts for 30 percent of your credit score, so you'll want to keep this low. Spending $900 would not be a good idea.
Put thought into your decision.
Just like you would with any other financial milestone. It's tempting to take the cashier up on that 15 percent off, but make sure you look past the immediate benefits. If you think you're the type of person who can pay their bills on time and keep your credit utilization low, signing up may have good long-term results.
It's always best to rely on your bank.
Whereas store cards might seem more intriguing, it's important to also rely on the comfort of your bank when it comes to your first (or second) credit card. Your bank most likely has a “starter” card that has certain restrictions to limit your spending, while also helping you establish your credit.
Sources:
[1] Is a store credit card a good deal?, Bankrate
[2] Opening 3 cards at once dings credit score, short-term, creditcards.com
NMLS #407985