We’ve all been there — standing at the checkout counter at a retail store watching the items moving across the scanner tack on more and more dollars to your total. Just as you’re about to break a sweat, the cashier offers you the option to open a store credit card, usually with an appealing introductory offer that includes hefty savings on your purchase.
While you might be tempted to say “yes,” it can sometimes be a bad idea to open a store credit card. In fact, a 2019 CompareCards study found that 46% of Americans who have opened a store credit card regret it — here’s why and how to know when a store credit card is a good idea and when it’s a bad one.
Last updated: Dec. 9, 2019
The Interest Rate Is Extremely High
The average credit card annual percentage rate was 16.68% to 23.70% as of November 2019, according to U.S. News. However, store credit cards tend to have significantly higher rates — the average APR ranges from 20.73% to 24.83%.
Check the APR before signing up for a new card — you don’t want to get stuck paying an interest rate of 25% or higher. The retail cards with the highest APRs have rates around 30%, with Big Lots, BP, Zales and Discount Tire credit cards having a minimum APR of 29.99%, while the Brandsource credit card has a minimum APR of 30.24%, the CompareCards study found.
These high interest rates can really hurt you down the line, especially if you open a card to do your holiday shopping, a time when Americans notoriously rack up credit card debt. A 2017 MagnifyMoney survey found that the average American had $1,054 in debt at the end of the previous shopping season. Having high debt plus a high interest rate could cancel out any benefits of the initial sign-up deal.
The Card Charges Residual Interest
“There’s something called ‘residual interest’ that happens quite often with retail credit cards,” said Bethy Hardeman, personal finance expert and product marketer at Tally. “This is the interest that’s charged on your balance after your statement date and before you pay your bill. You might think you’ve paid off your balance and forget about it again, only to be hit with a late fee for not paying off the residual interest and then even more interest.”
That means that if you make an initial charge of $2,000 and don’t pay it off right away, you’ll eventually have to pay the full interest on the amount.
The Discount the Card Offers Is Minimal
“If the discount is small, say 5%, for example, it may not be worth the risk of signing up for a card with an incredibly high interest rate,” said Leslie Tayne, founder and head attorney at debt solutions law firm Tayne Law Group.
You Can Only Use Your Card in One Store
“Most retail cards can only be used at their associated store,” Hardeman said.
That means you won’t earn rewards or cash back on purchases made elsewhere, so it might not be worth opening a new line of credit.
You Don't Have the Time To Think About Whether It's a Good Idea or Not
Oftentimes it’s when you’re at the checkout counter that an associate suggests you open a retail credit card to take advantage of an enticing sign-up offer. However, opening a new credit card should not be a spur-of-the-moment decision.
“When making financial decisions — like opening a new credit card, which can impact your monthly budget and your credit score — it’s best to think it through completely beforehand,” said Judith Corprew, executive vice president at Patriot Bank, N.A., based in Stamford, Connecticut. “The ideal place for that kind of thinking probably isn’t standing at a checkout counter in a store crowded with holiday shoppers. There are many factors to consider. What is the interest rate? Is there an introductory interest rate? Are there annual fees? And a dozen other questions that are a lot easier to think clearly about at your dining room table.”
Ask for a brochure and take the time to read it at home before making any decisions that could impact your future finances.
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It Increases Your Temptation To Spend
“Since retail cards often come with enticing promotional offers or attractive benefits, you may be tempted to spend more than you normally would,” Tayne said. “Additionally, you may be lured to buy products from that retailer because you have the card there, rather than searching for a better price elsewhere.”
You're About To Take Out a Loan or You Already Have a Low Credit Score
Opening a new store credit card could be a bad idea depending on your specific financial situation. This would include if you’re about to take out a loan for a large purchase.
“Opening new accounts may lower your credit score, albeit temporarily,” said John Madison, CPA and financial counselor at Dayspring Financial Ministry. “If you’re planning an important purchase like a home or new automobile, the reduction in your credit score may impact your approval or interest rate.”
Even if you’re not preparing for a major purchase but already have a low credit score, this could be a bad idea as it could make your credit score even worse.
You're Not Someone Who Typically Pays Their Credit Card Bills on Time and in Full
“If you are confident in your ability to pay off the full balance, a credit card can offer some useful rewards,” Corprew said. “But it isn’t a good idea if you are just kicking the can down the road because you will end up paying more in the form of interest than if you had paid in cash or with a debit card immediately.”
You Already Have Credit Card Debt
“Believe it or not, millions of Americans are still trying to pay off holiday impulse purchases from 2018, still stuck in the hamster wheel of credit card debt,” said Anuj Nayar, financial health officer at Lending Club.
If you’re one of those people, opening a new card will likely just add more debt to what you already have.
When Opening a Store Credit Card Is a Good Idea
There are risks every time you open up a new line of credit, but in some situations and for some consumers, opening up a store credit card could have benefits that outweigh those risks.
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The Interest Rates Are (Relatively) Low
CompareCards found that the five store cards with the lowest APRs — Bass Pro Shops Club MasterCard, Army and Air Force Base Exchange Military Star credit card, Dillards Rewards American Express card, REI Co-op Mastercard and the Apple Card — have minimum APRs that range from 9.99% to 12.74%. If you qualify for these low rates, you will have the same drawbacks with these store credit cards as you would with a traditional credit card. However, the maximum APR with these cards ranges from 11.99% to 27.24%, so keep that in mind if you have poor credit.
You're Loyal to the Store
While you certainly shouldn’t open a retail card at every store you shop at, if you have one or two you frequent, it might benefit you to open a store credit card. Benefits can include discounts, cash back, advanced access to sales and other perks that would benefit you as a frequent shopper.
You Can Pay Your Credit Cards on Time and in Full Every Month
Treat your store credit cards like debit cards — only charge as much as you can actually pay for. If you never carry a balance, you’ll never get hit with store credit cards’ notoriously high interest rates.
The Bottom Line: Make Sure You Know What You're Getting Into
Whether or not you ultimately decide to open a store credit card, make sure you know what you’re signing up for when you are promised special financing or a major discount at the checkout. The CompareCards study found that 15% of those with a store credit card didn’t realize it was a credit card that they were applying for, perhaps thinking it was a store loyalty card or a special financing deal with no strings attached.
Remember, if something seems too good to be true, it probably is. Carefully consider a retail card’s features and interest rates, as well as your own financial situation, before opening a card that you could eventually regret having in your wallet.
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About the Author
Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and People.com. Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert.