Should you open a store credit card?

Retailers offer discounts to their cardholders, but you need to understand the details before you apply. (iStock)

Make a purchase at almost any department or chain store these days, and the clerk will probably start the transaction by asking if you’d like to apply for their credit card. To sweeten the deal they may offer a percentage off of your first purchase. It can sound enticing, but are the savings worth the effort?

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Store credit cards, also known as retail cards, are designed to build brand loyalty. Some cards can only be used at that specific store, while others are co-branded with Visa and Mastercard and can be used anywhere.

In some cases, opening a store credit card can be a good decision—but in some cases it might not be. It’s important to know the pros and cons, so you make a smart decision before you sign up for a store credit card.

When to open a store credit card

One of the biggest reasons to open a store credit card is getting perks. Customers are usually offered a nice discount on the first purchase with ongoing discounts in the future. Cardholders may also be given other benefits, like credit card rewards, free shipping, receipt-free or extended returns, free alterations and birthday gifts. If you are a frequent shopper at the store, these perks could be beneficial.

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Another reason to open a store credit card is that it’s often easier to qualify. Retailers are competing for your business, and they are often more lenient about approving applications, even for customers who don’t have perfect credit. If you have previously applied for and been declined a non-retail credit card, such as a traditional Visa or Mastercard, you may still be able to get a store credit card.

Finally, retail credit cards can be vehicles for building or repairing your credit. Retail credit cards send reports to the three major credit bureaus. As long as you pay your card on time, you can get on the path to building good credit.

Why you shouldn’t open a store credit card

Store credit cards have downsides, too. First, they usually come with higher interest rates. The average annual percentage rate (APR) on a store credit card is about 26 percent on a store credit card, while the average APR for all credit cards is about 21 percent, according to CreditCards.com. If you think you may need to carry a balance, the interest you accrue could negate the savings of the discount offered.

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In addition, store credit cards usually have lower credit limits. While this may not seem like a big problem, it can impact your chances of getting financing in the future. Lenders look at your credit utilization ratio, which is the amount of credit used compared to the amount available, and a number that is 30 percent or lower is considered to be good. If your credit limit is low, you may use a higher amount, which can result in a higher ratio.

Another downside: While rewards and discounts can be enticing, they’re often limited to the retail store issuing the card. With non-store credit cards, however, you may be given have a wider range of rewards and options, such as cash back.

Store credit cards can put you at risk of spending more than you should. You may feel pressure to limit your shopping to the store where you earn points or rewards, and less likely to comparison shop with other retailers. And if you are trying to stick to a budget, having a constant offer of discounts could be a temptation that’s too hard to resist.

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Finally, being put on the spot to sign up for a credit card can lead to misunderstandings. The cashier may hand you a brochure, but you probably won’t hold up the purchase line and take the time to read the fine print. By the time you realize the card’s terms, it could be too late.

The bottom line

Store credit cards can be smart move in some cases, but a better move is taking the brochure and reviewing it at home instead of signing up on the fly. If you plan on making a large purchase and want to maximize your savings with a discount, do your research before you get to the store. You may find discount codes online that aren’t attached to applying for a credit card. Being a smart shopper involves doing your homework, especially when credit cards are involved.

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