Store Credit Cards: Do The Incentives Pay Off?

By Amy Fontinelle AAA

Have you ever wondered whether you should have said "yes" when the cashier asked you if you wanted to open a store credit card account and save 10% off your purchase?
While store credit cards fundamentally work just like regular credit cards, they have unique advantages and disadvantages. This article will examine the incentives stores offer with their credit cards, what pitfalls you might encounter if you sign up and whether the payoff could be worth opening an account. (For more on store credit cards, check out The Truth About Store Credit Cards.)

SEE: Check out our credit card comparison tool and find out which credit card is right for you.

Everyday Cash Back
Some store credit cards offer a flat percentage of cash back on every purchase. Earning 5% back on all of your purchases can be a valuable reward if you shop frequently at the same store. To determine if opening an account like this is worth it, first estimate how much you normally spend at that store in a given year. Next, calculate how much cash back you would earn given your current buying habits. For example, if the store credit card offers 5% back on all purchases and you spend $1,000 a year at that store, your annual cash back would be $50 (0.05 x $1,000).

Then decide if the cash back you expect to earn each year is worth the trouble of managing another credit card account. The more accounts you have, the more likely you are to forget to pay a bill. Even one slip-up can significantly reduce or even completely negate any bonus you get from using that card.

Also consider the psychological factors of having a cash-back store credit card. Knowing that you will essentially receive 5% off everything you buy might influence your spending habits and encourage you to buy more than you normally would. While you might get more stuff at better prices as a result of having the card, you might spend more overall, and that's not good for your overall financial situation.

Card Opening Purchase Discounts
Some store credit cards offer a more generous percentage off, but only on your first purchase or your first day's worth of purchases. This discount usually falls in the range of 10 to 20% off.

If you were going to make a large purchase at the store anyway, or if you were planning to make several smaller purchases that you can combine into one larger purchase, the credit card opening bonus discount can help you offset the cost of that purchase - as long as you don't use the discount as an excuse to buy more stuff. If you weren't already planning to make a large purchase at the store, the discount might encourage you to overspend.

Again, you'll have to decide whether the initial discount makes the trouble of managing a new account worthwhile. To determine whether it's worth it to open a credit card to get a discount on your first purchase, calculate how much your first purchase would amount to. Then determine how much the credit card discount will save you. If you're planning to spend $200 on some miscellaneous additions to your wardrobe, even a 20% opening discount will only amount to $40. On the other hand, if you are about to spend $2,000 on new kitchen appliances, a 10% opening bonus would net you $200.

Before you open a store credit card to get a one-time discount, consider whether you could get this same discount by waiting for a sale or coupon. Perhaps you can get all of the savings without the trouble of adding another credit card to your wallet.

Another way to determine whether the bonus amount is worthwhile is to compare it to the credit card bonuses offered by non-store-specific cards. If the main reason you want to open the store credit card is to get the account-opening bonus, why not get that bonus with a credit card that you can use at any store instead of with a credit card that you can only use at one store? (For other bonus credit card companies are offering, check out 5 New Ways Credit Card Companies Are Wooing New Card Holders.)

Ongoing Cardholder Exclusives
Some store credit cards have ongoing special offers for cardholders. If you're a regular customer, these special offers might be of great interest to you. Before you apply for the card, find out what kinds of promotions - if any - are offered exclusively to cardholders. Common examples include special sales and high-value coupons.

If the store also regularly offers sales and coupons to the public, consider how the exclusive cardholder offers compare to the public offers. Are the additional savings from being a cardholder worth the trouble of having another credit card?

Another important consideration is whether these promotions will really save you money. They may just encourage you to shop more often and spend more money. Each time you receive a special offer, you're not just receiving a coupon or notice of a sale, you're also receiving a tempting advertisement.

No Payments, No Interest for 12 Months
Stores that sell expensive items may offer credit cards that allow you to postpone payment for anywhere from six months to three years. If there's something you want or need to buy right now but you don't have the cash or don't want to part with the cash, these offers can be very tempting.

Before you sign up for a card to take advantage of a delayed payment promotion, ask yourself why you want to put the purchase on credit. If you can't afford it now, what makes you think you will be able to afford it when the bill is due? How much interest will you be saddled with if you can't pay the final bill before it becomes due in full?

Someone might consider taking an offer like this even if they could afford to pay for the purchase in cash in order to keep their cash in their account earning interest for longer. This strategy might make sense for extremely responsible consumers making large purchases in a high-interest-rate environment with a long repayment period, but otherwise, the potential payoff probably isn't worth the trouble or the risk. For example, postponing payment for a $1,000 purchase for 12 months when you can earn 5% interest annually in an FDIC-insured CD would give you $51.27 with interest compounded daily. Is the possibility of making $51.27 worth the risk of being penalized with a 30% APR?

There's often a catch with offers like these: If you don't pay off the balance by the end of your promotional period, you'll be charged interest not just for the portion of the purchase you haven't paid off yet, but for the entire purchase. Similarly, for offers that require you to make only the minimum payment, interest-free, during the promotional period, being late on a payment can cause interest for your entire purchase amount to kick in. Reading and understanding the fine print of these offers is essential.

Even if you understand what you're getting yourself into, consider whether the risk is worth it. How much interest could you get stuck paying if you make a mistake? Even the most responsible credit card user can make a simple mistake like missing a payment deadline. (To learn more about these interest-free credit promotions, see Delayed Interest: Buy More, Pay Much More Later.)

Other Considerations
If you're considering opening a store credit card to get the perks, ask yourself if you will pay your card balance in full and on time every month. If there's a chance that you won't, the incentives are worthless - in fact, they're likely to get you into financial trouble.

Opening a new credit card has a small, short-term negative impact on your credit score. If you're about to apply for an important loan, like a mortgage, now is not the time to get a new credit card. However, once the new loan has closed, you're good to go.

Remember, stores want you to open their credit cards for a reason. By asking yourself what the store may be hoping to get out of the credit relationship, you'll get an idea of the ways the card might end up costing you money rather than saving you money. However, for people who are very responsible with both their spending habits and their credit management, store credit cards sometimes offer ways to come out ahead. (For more on how your credit score is influenced by credit cards, read How Credit Cards Affect Your Credit Rating.)

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