Some Things to Know Before Opening a Store Credit Card

Highlights:

• Not using a store credit card, or any credit card, responsibly can negatively impact credit scores
• Store credit cards may carry higher interest rates than some other available credit cards
• Research interest rates, fees, benefits, and rewards before applying for store cards

We’ve all been there. You’ve got an armful of clothes and you’re watching the total inch up higher and higher. Then the store clerk says: “Would you like to open a credit card for an extra 15 percent off?” 

What’s the harm in opening a store credit card? It’s tempting, but as with any credit card, there are a few factors to consider first. 

The potential plus side of store credit cards

When used responsibly, store credit cards may provide great benefits. Some store credit cards offer cash back rewards or points that may be redeemed for discounts.

Perks like an interest-free repayment period may help build your credit history -- if you pay your balance in full before the interest accrues. Also, store credit cards (like any credit cards) may add to your credit mix; lenders and creditors generally like to see that you’ve been able to manage different types of credit accounts responsibly. 

The fine print

Cashiers and store employees may gloss over details of their store cards or describe them as loyalty cards vs. credit cards. And when you’re standing there with a load of clothes and a total that rivals your car payment, it may seem like a great idea to open a credit card and get a discount. But store credit cards are just like any other credit card – they have the potential to be reflected on your credit reports and potentially impact credit scores negatively if not paid as agreed.

When you apply for a new credit card, it will generally result in a hard inquiry on your credit reports. A hard inquiry  – when a potential lender reviews your credit report because you've applied for credit – may affect your credit scores, particularly if there are multiple hard inquiries within a short time. And these inquiries  may stay on your reports for up to two years. 

Opening up a new credit card may also lower the age of your newest credit account, which may impact credit scores. The length of your credit history factors in the age of your oldest and newest credit accounts, as well as the average length of all your accounts and how long it’s been since a credit account was used.  The length of your credit history is frequently a contributing factor in calculating credit scores

As with all credit cards, it is important to understand how much it will cost you to have a store credit card. Store credit cards may have lower credit limits and may have higher interest rates than some other credit cards. Like all credit cards, store credit cards may charge fees in addition to the interest you will pay on any unpaid balance each month. The total cost of using a credit card is generally stated as an Annual Percentage Rate, or APR. Credit card companies are required to disclose the APR before issuing the card and also on monthly statements.

 When interest accrues, you wind up paying interest on top of the amount you charge to the card. If you don't pay your balance in full each month, interest will accrue on top of the amount you've charged to the card, increasing your debt. That may affect your debt to credit utilization ratio – the amount of available credit you’re using compared to the total amount available to you. And that, in turn, may impact your credit scores.

What about paying the card off and immediately canceling it? That may sound harmless, but your credit scores can still be impacted by the hard inquiry. Hard inquiries remain on your Equifax credit report for two years, although their impact on credit scores may lessen as time passes.

The bottom line of opening a store credit card

Before you open a store credit card, be sure to do your research into the benefits, rewards, and costs associated with the card.