Why you should stay away from store credit cards

Why you should stay away from store credit cards

You know the drill. You’re browsing through a store or approaching the register when a salesperson asks this enticing question: “Would you like to open a store credit card? You’ll get a 10% discount on your entire purchase.”

Tempting, but don’t do it! Interest rates on store cards are generally 20% or more—much higher than the national average. This means that if you put a $500 shopping spree on a store card to get the 10% off, and then pay only the minimum on your bill each month, you could easily end up spending an extra $400 in interest. That’s one costly $50 discount.

If you’re sure you can pay off the purchase immediately and your starting purchase is truly large, it might be worth it, but otherwise use your own low-rate card.

Opening another credit card could also come back to hurt your credit score. Every time you apply for new credit, an inquiry is noted on your report. Credit scoring systems tend to punish people with a lot of inquiries on their credit report, because it can be a sign that they’re applying for more credit than they can handle.

So, what if you already have some store credit cards? Should you close them? Probably not, also for the sake of—you guessed it—your credit score. Here’s the deal: Lenders like to see that you’re only using a small percentage of your potential credit (called your usage ratio). If you cancel a card, you lower the total amount of credit available, so your usage ratio goes up.

For example, let’s say you have 4 credit cards, each with a $1,000 limit, and you owe $2,000 spread across all the cards. Your total credit limit is $4,000 and your usage ratio is 50%. (You’re using $2,000 of the total $4,000.) If you close a card, you still owe $2,000, but your total credit limit shrinks to $3,000, so your usage ratio will jump to 67%. Lenders will see you as a higher risk, and your credit score will probably slip a few points.

What’s more, the further back your current accounts go, the better. You can cut up the cards or hide them in a drawer if you want to avoid using them, but think twice before you cancel them.

Which store credit cards did you just *have* to get?

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