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Why You Should Avoid Opening a Retail Store Credit Card Just for the One-Time Discount (Hint: It Could Hurt Your Credit Score)

As you’ve been holiday shopping this year, you were probably bombarded with offers to save money by signing up for a store’s credit card. Sales associates often offer customers a one-time discount of 10-15% for applying – and it’s working. According to Equifax, Americans currently have more than 183 million retail-issued credit cards. If you’re making a large purchase, the savings can be tempting, but are store credit cards a good idea in the long run? It depends.

Unfortunately, no matter how good the discount sounds, store credit cards are usually a better deal for the issuer than they are for you. Consider:

First Comes the Credit Pull

When you apply for any credit card, your credit report and score are pulled by lenders so that they can check your worthiness. Unfortunately, this impacts your credit score negatively by a few points. By spacing out your credit applications, you’ll assure that your credit score won’t take a serious hit. But many pulls in a short time frame can definitely bring your score way down. It may not be worth taking that kind of hit just to secure a couple one-time discounts. And it could be worse for your score if you apply and are denied.

Lowers Your Credit Utilization

How much of your credit limit you use has a major influence on your credit scores. The only thing that matters more is paying on time. The credit limits on retail cards that you use only at one store or chain are typically about 10% of those on comparable general-use credit cards, so in order to keep your credit utilization low, it’s suggested to pay your bill before the issuer reports the balance to the credit bureaus. Call the customer service number on the card to find out when that is. Or get in the habit of making online payments as soon as you purchase something. That way, your charges never stack up.

High Interest Rates and Undesirable Terms.

While the average interest rate for an American credit card is around 15%, those for retail credit cards are usually upwards of 20% to 30%, and some cards can be even higher than this. Not only are rates high on this card, but they are variable and at the whim of the lender. This means you could start with what you think is a decent rate that is only increased a couple months later. It’s definitely not something you want to maintain a balance on and with interest rates like this, it won’t be long before your “discount” is canceled out by interest charges and your so-called bargain turns into a nightmare.

Approval Can Decrease Your Credit History.

The “length of credit history” means how long any given account has been reported open. Generally, the longer an account has been open and active, the better it is for the credit score. Credit History calculates the average of how long all your accounts have been open. That average age of accounts is your “credit age.” Opening a new account often causes the average age of your credit accounts to decrease. Credit age is a minor factor in scores, but every point counts.

IMPORTANT NOTE: If you already have a store card? Don’t close it — that also would hurt your average age of accounts. Better to use it lightly and pay on time. Both actions have a positive effect on your credit scores.

But Oh the Temptation.

You may sign up for a store credit card for savings, but if it leads you to spend more than you intended – either on the day you sign up, or subsequently – is it worth it? If you can’t keep an eye on your purchases as closely with a store credit card as you can without one, you might be better off without. As always, opening a credit card should not be done on impulse. Review all the factors carefully before deciding whether or not it’s worthwhile; don’t let your sales associate pressure you. After all, would you make any other important financial decisions in a busy check-out line?

The Bottom Line

There’s no right or wrong answer when it comes to store credit cards. If it’s a bad idea for you to sign up for another card, making it a retail-issued card just makes it worse. On top of potentially hurting your credit score, retail cards have usability issues. They might only be good only at one store or retail chain, usually have high interest rates and typically have less robust security alerts than traditional cards.

You might be better off using a traditional credit card, especially if you have a rewards card that offers cash back on every purchase, not just the initial one. You may also be better off signing up for a standard rewards card, though, so evaluate all of your options or ask Member Services before taking the plunge.