That Signup Bonus for Getting a Store Credit Card Isn't Enough

Portrait of happy couple paying with credit card in store
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Whether you're out on a shopping spree to take advantage of a great sale or focused on buying just one thing, who doesn't like the chance to save 10 or 20 percent more? The ubiquitous offer of a store credit card with its accompanying signup discount can seem a tantalizing way to save. Before you start the application process rolling, though, stop and think about the potential impacts.

"Before you decide to apply for a store card, you need to think about whether the terms of that card are good, just like you would for any other credit card," says Matthew Goldman, founder and CEO of Wallaby Financial. "In general, don't sign up every time you're offered a card. That's a good way to get yourself in trouble."

Store cards do offer the advantage of a discount and other perks, and they can sometimes be valuable for establishing a credit profile or rebuilding your credit, but not all retail credit cards provide the same benefits. And on the flip side, the addition of a new credit card could backfire on your credit and actually lower your score if you run up the balance. Let's look at what these cards offer and what you need to watch out for.

Store-Only Cards or National Logo Credit Cards

Large retail chains often have both a store-specific retail card that you can only use in the store and a credit card that is co-branded with Visa, MasterCard, Discover or American Express.

"The main disadvantage of a store-specific card is that it's not honored at other locations," says Scott Bird, founder and president of Estate Preservation Advisors. "The major bank or national credit cards can have perk programs that far exceed [those of] your store-specific card, and the interest rates charged on bank cards are lower depending on credit score and other scoring criteria."

Goldman says that store-specific credit cards tend to have a higher interest rate than co-branded credit cards offered by many stores.

"Typically the card you're offered by a retail store depends on your credit," says Goldman. "If you have a lower credit score you're usually only offered the store card. But using a store card can be a good way to build credit if you're careful."

Bird says that retail credit cards with a national brand such as Visa or MasterCard offer a better way to improve your credit. "The credit cards you can use anywhere are more predictive of your spending habits and repayment pattern, thus having more weight in determining your credit score," says Bird.

When to Avoid Retail Credit Cards

If you're an impulse shopper or lack the discipline to pay off your credit card balance or to at least keep the balance low, a store credit card may not be worth the sign-on discount.

The credit limit is typically lower on a store-specific credit card, sometimes as low as $100, says Bird, and ranges into the low thousands. Co-branded cards typically offer a higher credit limit. "You need to be careful not to go over your credit limit or to use more than 50 percent of your available credit on one card because that can lower your credit score," says Goldman. "It's a lot easier to do that if you have a low credit limit."

Besides potentially damaging your credit, you could end up paying a lot of interest on a store card. "High interest rates for store-specific retail cards, which typically run between 20 percent and 30 percent, make unpaid balances very expensive," says Bird. "These charges can quickly exceed the discount for signing up for the card and, if left unpaid, can end up costing more than the original purchase."

Late payments and a maxed-out card can do a lot of damage to your credit profile, says Goldman.

When It Makes Sense to Get a Store Card

Building your credit with a store card can work, however, if you pay off the balance and make your payments on time. There are some other potential reasons to say yes to a card offer at the register.

"If you go to a particular store a lot or you're making a major purchase, opening a store credit card could be advantageous," says Goldman. "For instance, if you shop often at Nordstrom (JWN) and earn rewards points every time, then you can save money. Or if you're buying a new couch at Macy's (M), 20 percent off is a great deal. But 20 percent off a $15 shirt doesn't make a lot of sense."

Goldman says that some customers like to use a specific credit card for certain purchases as a form of budgeting, such as using that Nordstrom card for all clothing purchases, especially if it's a co-branded card that can be used at other retail locations.

"The Target (TGT) Redcard is a great store-specific card if you shop there often, because you get five percent off everything every day and free shipping when you order online," says Goldman. "A lot of store cards give you extra benefits such as 90-day return policies instead of 30-day returns, and free shipping."

Goldman says retail store credit cards are best for people who use the card in one of the following ways:

  • Shop frequently and spend a lot of money at one store.

  • Shop often across a group of brands owned by one retailer (such as Gap, Banana Republic and Old Navy).

  • Plan to make a major purchase that will make the sign-up discount more significant

  • Charge a lot to a co-branded credit card to earn rewards.

"People don't realize that they can save an average of $600 to $800 annually by using rewards credit cards," says Goldman. "But they have to be careful to pay the balance and protect their credit."

Motley Fool contributor Michele Lerner has no position in any stocks mentioned. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's free report on one great stock to buy for 2015 and beyond.