It’s a common refrain during the holiday season – department stores and other outlets offering discounts of 10% to 30% or more on your first purchase if you sign up for their store credit card. If you’ve got several hundred dollars in purchases lined up, it may seem like a tempting offer, but be aware – department store cards often charge the highest interest rates of any credit card, and they also generally come with some of the lowest limits. If you are going to open a store credit card, you should do so after careful evaluation, not as a spur-of-the-moment decision in the checkout aisle. So when are department store credit cards a good idea?
1. Your purchase amount is one that can be paid off easily within a few months at most. Charging thousands of dollars to a department store card is a lose-lose situation. You lose out due to high interest rates, and you also lose out based on the typically lower credit limit. Always figure up the interest charges when evaluating your savings. A 10% discount may sound good now, but you’ll pay far more than that in interest on a department store card that has a 29% APR.
2. The credit limit is reasonably high compared to the purchases that you want to make. Even if you are only charging a few hundred dollars, if your credit limit is too low, your credit scores will suffer as a result. If you can, get a reasonable credit limit confirmed on the department store card before you make a purchase. Make sure to monitor your credit limit from month to month, as creditors are not required to notify you if they lower your limit. Ideally, charge items to the card, and pay it off each month – this way, you will avoid interest charges and still keep the account active.
3. You already shop at the store in question. Never pick up a department store credit card just because it’s offered. If you are making a one-time purchase, it may be too tempting to use the card again later ‘just because’. Better to make that purchase on a card that you already have and pay it down, rather than opening up new lines of credit at stores that you wouldn’t otherwise patronize.
A final word: Pay attention to penalties as well as benefits. Some store cards offer points or rewards that can save you money, but if the interest rates and fees are too high, it can quickly offset any benefit that the rewards system offers. Look at your spending realistically, and evaluate whether or not a store credit card will help your credit, or do more damage than it’s worth.