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

    5 Credit Cards For the Super Rich

    Understand the difference between an average credit card and an elite credit card for the wealthy. Learn about the top five credit cards for the super rich.
  2. Budgeting

    Key Questions to Ask Before Moving in Together

    Moving in together is a big step. Here are some key financial questions to ask your partner before you make the move.
  3. Credit & Loans

    Explaining Equated Monthly Installments

    An equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
  4. Stock Analysis

    The Biggest Risks of Investing in Amazon Stock

    Find out which risks are most important to Amazon's shareholders. Learn which operational risks impact share prices and which financial risks affect investors.
  5. Stock Analysis

    How Does Jet.com Work and Make Money?

    Learn how Jet.com is taking on retail giants Amazon, Walmart and Costco by promising to save customers an average of 10 to 15% on over 10 million items.
  6. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  7. Investing News

    This is the Fastest-Growing Consumer Complaint

    There’s no way to guarantee that your Social Security number won’t fall into the wrong hands. Here are some ways to make yourself less of a target.
  8. Stock Analysis

    How Does Casper Work and Make Money?

    Learn how the startup Casper is delivering a good night's sleep directly to customers' homes for a fraction of the cost of the competition.
  9. Stock Analysis

    4 Catalysts That Could Propel Best Buy's Stock Forward

    Understand the current Best Buy model and why it has been failing lately. Learn about the top potential catalysts that could increase Best Buy's stock price.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Globl Consumer Discretionary

    Explore analysis of the iShares Global Consumer Discretionary ETF, and learn about the suitability of this fund that tracks the consumer discretionary sector.
  1. Will my credit score suffer from debt consolidation or refinancing?

    You have several options for reducing your debt burden. You can enroll in a professional debt management plan, or consider ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

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!