Who hasn't succumbed to signing up for a store credit card? It's okay — this is a safe space. We won't judge if you've got a few (or more) in your wallet.
Store credit cards often have incredibly appealing incentives that make signing up attractive — and all too easy when you're at the checkout. It's almost like an impulse buy: Steep percentages off your first purchases? Sounds great! A bunch of dollars down and 0% APR for six months? Sign right up.
But everything, and especially credit, comes at a price: Store credit cards often come with major drawbacks down the line, despite the short-term rosy outlook.
"Usually we tell clients to skip the upfront savings unless they are buying a really big ticket item like furniture," says Priya Malani, a partner at Stash Wealth. "In that case, open the card to get the discount, pay the card off in full, and then close the card after a few months. The Victoria's Secret semi-annual sale is not a great time to open their store card even though they are pushing hard."
Malani says there's a reason they're calling your name, and it's because they know you're a fan: Unless you have enough willpower to resist charging every time you pass a storefront, you could find yourself in over your head in short order.
Current credit card interest rates hover around 16.5%, and it's well known that this kind of high-interest debt is should be paid off first. Last year, however, CreditsCards.com found that the average rate for a retail card was 23.84% (or as high as 29.99% in one case) — nearly twice the 2016 average of 15.18%. Default rates have increased at Synchrony Financial, a major issuer of store-brand credit cards. The rise could portend a growing economy — or that consumers are having a hard time paying off their credit card balances. So, store credit cards aren't necessarily evil but they do have very limited use, says Kimberly Palmer, a credit cards expert at NerdWallet.
"If you shop a lot at one store and you pay your balance in full every month, a store card could benefit you by saving you more money than a general credit card would," she explains. "But, in general, store cards tend to have low credit limits, high interest rates, and limited rewards. So, if you shop at a lot of different stores, you might be better off with a more flexible credit card instead."
Lower interest rates might not sound like such a bad thing until you remember that high credit utilization ratios can negatively impact your credit score. So if you do decide to open a store credit card (maybe you live in Target or would name your first child Amazon), make sure that you are benefitting from its use — not the retailer — and manage the balance carefully.
Otherwise, Palmer says that shoppers are generally better off selecting a card with more flexible rewards, such as cash back or rewards points they will actually use. Also, "if you carry any credit card debt at all and are working toward paying it off, you want to focus on finding a card with a no-fee balance transfer and a low or 0% introductory APR."
If you're looking for a better credit card option, Malani and Palmer both suggest looking at traditional cards that provide more benefits for you. Malani suggests the Chase Freedom Cash Back card, CapitalOne Venture, or the DiscoverIt card for people just starting out. If you haven't opened one just yet, and know your situation will likely end up in a balance carrying over month to month — skip the store cards for now.
"Ninety-nine percent of the time, clients [at Stash Wealth] are required to close store cards as part of their homework," Malani warns. "So don't open them to begin with."