Should You Sign Up for a Store Credit Card (this holiday season)?

Have you ever purchased an item at a store and the salesperson asks “would you like to apply for a (name of the store) credit card? If so, you can save (they will stipulate anywhere from 5%-20%) on this purchase.”

One issue to consider is whether you should first survey credit cards in the open market to see whether the store credit card is a worthwhile card to have. Some stores offer incentives such as a discount on purchases the day in question or provide a coupon for a future purchase when you open the credit. However, there are credit cards that often have lower interest and that can make a huge difference when you have a (continuing) balance due: notably some cards have interest in the range of 9%-15%, while others are 18%-22%. Additionally, far too often some individuals already have too many cards with large balances due &/or continue to incur debt and find themselves in a situation they cannot realistically extricate themselves in the near future, if at all. In other words, the escalating balances that are due on credit cards are combined with monthly interest (and perhaps late fees at times) that grow at high interest rates to offset any monthly payment; some people find they owe more at any given time after making monthly payments even if they do not purchase anything else on the particular card. Also, your credit score can be lower (evidencing a higher risk to creditors) when one reaches or is close to reaching his/her limit on the card. This is known as the utilization rate; it is better to have a large dollar amount as “available credit” than to max out on your card(s).

Today, it is not uncommon for one to earn “rewards” with credit cards. Some offer miles on airlines while several offer cash back when you reach a certain dollar amount of purchases after a given period of time, and others simply pay cash back once a year. You should evaluate whether the rewards are only good at the store in question and/or are rewards you realistically can and will use in the future.

Lastly, it is not advantageous to be applying for credit from multiple sources as each time one does so it can negatively impact a credit score. Some individuals discover when they desire to refinance their home, get a line of credit and/or purchase a big ticket item such as an automobile or home there are extra points (charges) to the loan because of this noted in their credit history. The same is true if one applies at multiple banks for a loan as the credit bureaus use this to lower a credit score as they deem you a bigger risk.

In short, when you are shopping for holiday gifts this season, keep in mind the number of cards you already have when applying for any new credit cards and how close in time of such applications. It cannot be overstated, however, that it is beneficial to pay off as many cards as you can, and to try and spend only what you have in cash.