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When to say "no" to a store credit card

By , CardRatings contributor
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About two in three American shoppers spend more than $500 on holiday gifts every year. That makes the new credit card discount offers at most retailers very attractive to cash-strapped consumers. Gift givers who use retail credit cards strategically can save $50, $100, or even more on their annual shopping lists. Some stores even hand out extra freebies to attract new accounts. However, if you're not careful, that short term savings can turn into a long term financial burden that can weigh more than whatever presents you chose to hide in a stocking.

Retail historians often cite J.C. Penney's early credit card strategy as the template for modern store credit accounts. It's a feat of historical irony, given the company was founded by a man whose middle name was "Cash." Today, most stores offer credit cards with easy, in-store signups. Many of those "instant credit card" offers come with percentage-off discounts or other incentives that can save money while inflating the cost of your shopping spree. Understanding the pros and cons of store credit cards can help you decide which offers will really help your household's bottom line.

Retail Credit Pros:
If you were planning to pay with cash anyway, or if you're thinking about building a credit history, retail credit cards offer some powerful benefits:

  • Store-only cards offer easy ways to establish credit. Most Americans' first credit card often comes from a retailer like Gap or Target. According to The Ultimate Credit Guide author Gerri Detweiler, low merchant risk means store credit cards are easier to get if you have no credit history.
  • Special financing deals. Furniture stores and electronics retailers often extend no-interest or no-minimum-payment deals to attract holiday shoppers for big-ticket items. Penalties for missing a deadline can be high, so smart shoppers have to pay close attention to the fine print.
  • Shopping passes and savings events. Retailers use your store credit cards to track your shopping history. Spend enough, and you'll get invited to VIP events like members-only trunk shows or clearance sales. Agree to a paper statement or an online newsletter, and you'll often get bonus coupons throughout the year.

You can tell if a retail credit card is a winner if it gives you significant value compared to a bank-branded rewards card. With some cash-back credit cards offering rebates of up to 5% on all holiday purchases, retailers have to step up their game to compete.

Retail Credit Cons:
If you wonder why the cashier doesn't sound so enthusiastic about their company's credit card, it could be because of these cautionary tales:

  • Double-digit interest rates. APRs on retail credit cards remain some of the highest in the country. Retailers long ago discovered that they could make up in interest payments what they give up in "loss leader" holiday discounts. Even when a retailer doesn't issue cards directly, the commissions they generate from lenders offset the craziest Black Friday prices.
  • Credit history impact. Open too many lines of credit, and you could make it hard to qualify for a mortgage or for a low insurance rate. Cutting the card up or never using it after the initial purchase doesn't erase that line of credit from your history, and canceling the card can actually lower your credit score in some cases.
  • "Gotcha" clauses. Recent federal regulations forced banks to adopt less harsh penalties for missing minimum credit card payments. Retailers, however, still have the ability to revoke special privileges or charge extra fees if you fail to meet the terms of certain promotional offers.

Detweiler suggests that most consumers restrict themselves to just one or two in-store credit applications every year. Applying for more than that can trigger fraud alerts or high risk flags at the major credit bureaus.

Stacking the Cards in Your Favor
Retailers often ambush you with credit card offers in the checkout line because they know you want to be polite and you might not have the chance to do some serious math. Only by running the numbers will you really know whether the store card can save you enough cash to justify a new account. Ask yourself the following questions:

  • Do I really shop here that often? If you're addicted to your favorite retailer, packing one of their house credit cards really can save you money all year long. If you only stop by a store at holiday time, you'll need to spend a lot to make the new line of credit worthwhile.
  • Will the costs outweigh the short-term discounts? A department store like Sears or Macy's may offer a 10% "shopping pass," but a 20% or higher APR could erase your savings if you let your balance ride for more than a month.
  • Can I manage another monthly bill? You may be a whiz at paying your favorite credit card on time every month, but many of us lose track of new bills. If you fear you might miss a single payment, avoid penalties that could crush your budget and decline the offer.

Holidays give us a great excuse to treat our loved ones to splashy gifts, but it's important to keep a cool head during this year's deep discount sales. Retailers carefully design their stores to inspire even bigger gift ideas. Sticking to a set budget and researching prices in advance can prevent a snap decision that could ruin your credit. Before you head for the mall or the outlets, use our database of credit card offers to find out if a bank can beat the savings at your favorite retailer.

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