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.
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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.
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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.
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