If you've shopped lately, you're probably heard the siren song of the store credit card. Signs scream that you can "save more with your (fill in your store name of choice here) card." Sales people tempt you with promises that you can "save an additional 15% off your purchase today if you sign up!" All these money-saving offers can make opening a store credit card an attractive offer. But once you factor in the impact to your credit score and interest rates, are store credit cards really as good as retailers would like you to believe? Learn about the good, bad and the ugly behind store credit cards. (A decade before MasterCard or Visa existed, the first credit card company emerged. For more, see How Credit Cards Built A Plastic Empire.)

The Good (Credit Builder)
If you are a young adult or have had past financial turmoil which has left you with little to no credit, you will need a way to begin establishing a history. It's a catch-22, but without proof of responsible credit use, larger bank card credit issuers often won't approve your credit application until you've proven your worthiness. This is where store credit cards can be a good way to establish your credit history.

IN PICTURES: 9 Ways To Go Bankrupt

According to personal financial expert Liz Pulliam Weston, author and columnist for MSN Money, "department stores that issue charge cards typically use finance companies, rather than major banks, to handle the transactions. These cards don't do as much for your credit scores as a bank card (Visa, MasterCard, Discover, etc.), but they're usually easier to get." Once you've demonstrated responsible use with the store card, you can branch out into the globally accepted bank cards.

To Cancel or Not to Cancel?
A common consumer mistake when it comes to store credit cards is planning to get the discount on your current purchase, and then later close the card. According to Bankrate.com, that strategy is flawed. That's because about 15% of your credit score is based on how long you've had credit. So, if have only a few credit accounts, your credit score might actually benefit from the example of longstanding credit history (assuming you've used it responsibly).

The Bad (Number Crasher)
Thanks to instant credit approval, you can now open a store credit card in about ninety seconds with little more than your social security number, driver's license and home address. But, there is a price to this convenience, and it may also sour your very objective in opening a store card (to save money). That's because these credit-seeking transactions have a long-term impact to your credit. Known as a "hard inquiry" on your credit file, experts estimate that they can impact your credit score by as much as 30 points. (Follow these tips and techniques to rebuild a ruined credit rating, see 5 Keys To Unlocking A Better Credit Score.)

That number becomes powerful when you consider the impact of holding multiple accounts. Myfico.com estimates that the average American consumer has 13 credit obligations on record at a credit bureau. Of those, nine are likely to be credit cards. If you fall for the "savings pitch" repeatedly and apply for multiple store credit cards (as many people do), the long-term impact can really ding your score. Ultimately, this will impact what you pay for everything, including mortgage interest rates, auto loans and other credit cards.

In Pictures: What's Eating Away Your Money?

The Ugly (Interest Rates)
While store credit cards entice prospective cardholders with discounts, rewards and special offers, the high interest rates that accompany many of them nullify any hope of saving money if you can't pay the balance in full each month. As of November 30, 2010, the average reward credit card rate is more than 17%, according to indexcreditcards.com. Compare saving 15% on a promotion to what you could be paying in interest on the credit purchase, and the offer quickly loses its appeal.

The Bottom Line
Whether store credit cards are good or bad can often depend on your current financial life stage. In order to determine what is right for your credit score, remember that the number is based off of five factors (payment history, amount owed, credit history, new credit and the types of accounts you hold). Be aware of your credit score and what is on your report. With that information, you can gauge your strengths and weaknesses in the five credit factors and determine if a store credit card will be a bust or benefit to your score.

Find out what happened in financial news this week. Read Water Cooler Finance: Barack Obama Vs. The World.

Related Articles
  1. Credit & Loans

    Can Corporate Credit Cards Affect Your Credit?

    Corporate cards have a hidden downside. If the company fails to pay its bills, you could be liable for the amount and end up with a damaged credit rating.
  2. Investing Basics

    10 Companies That Yuppies Love

    Learn about 10 companies loved by the modern Yuppie, including how this demographic's impressive buying power has boosted these companies' earnings.
  3. Investing News

    What Is The New Credit Card Chip Good For?

    Under current U.S. credit card requirements, credit card issuers are required to issue chip cards as of October 1, 2015. Instead of swiping your card as you do now, you will slide the card into ...
  4. Credit & Loans

    5 Ways to Maximize Your Credit Card Points

    How to get the most bang for your rewards buck.
  5. Investing

    How to Effectively Compare Credit Card Rewards

    There are so many different reward credit cards that are available. Understanding how each type work will help you pick the best card for your needs.
  6. Credit & Loans

    Your Credit Score: More Important Than You Know

    Credit scores affect key aspects of your personal and professional life. Knowing your score and managing your credit input can make a big difference.
  7. Credit & Loans

    Joint Credit Cards: The Pros and Cons

    A joint credit card may sound like an easy way to split the bills, but make sure you know what you’re getting into first.
  8. Credit & Loans

    Travel Tips: Avoid Exchange Rate Headaches

    How to avoid the most common issues and hassles raised by exchange rates while traveling abroad.
  9. Investing News

    How 'Honesty' Could Pay off for Jessica Alba

    Is it possible that Jessica Alba is one of the savviest businesswomen on the planet?
  10. Investing

    Why U.S. Credit Cards Are Getting a Chip and Pin

    With the introduction of EMV technology into U.S. credit cards, consumers should worry less about fraud and counterfeiting.
  1. Fast Fashion

    Definition of "fast fashion."
  2. Transferable Points Programs

    With transferable points programs, customers earn points by using ...
  3. Duty Free

    Goods that international travelers can purchase without paying ...
  4. Luhn Algorithm

    An algorithm used to validate a credit card number.
  5. Roll Rate

    The percentage of credit card users who become increasingly delinquent ...
  6. Truncation

    The requirement mandated by the FTC for merchants to shorten ...
  1. How can I invest in electronic retailing (e-tailing)?

    Electronic retail is one of the fastest growing segments of the economy. Every year, more people are choosing to purchase ... Read Full Answer >>
  2. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  3. What are some common ways product differentiation is achieved?

    There are many ways to achieve product differentiation, some more common than others. Horizontal Differentiation Horizontal ... Read Full Answer >>
  4. What economic indicators are important to consider when investing in the retail sector?

    The unemployment rate and Consumer Confidence Index (CCI) rank as two of the most important economic indicators to consider ... Read Full Answer >>
  5. What factors make it difficult to compare performance ratios between retail stocks?

    Companies that operate in the retail sector significantly differ in terms of their profitability and efficiency, making stock ... Read Full Answer >>
  6. Which socially responsible retailers appeal most to ethical investors?

    Ethical investors have many reasons to consider companies in the retail sector. The sector is broad and features an abundance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!