Should I Open a Store Credit Card?

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"Would you like to get a store credit card and save 15 percent on your purchase today?" the sales lady's voice sweetly rings.

You freeze for a moment and wonder — I don't know, do I? Are there any drawbacks to taking out a card? Can this hurt me? Or is my apprehension unfounded?

Sensing your hesitation, the lady attempts to seal the deal by pitching their rewards system. Well, guess what? You can ignore the fluff and decide for yourself by knowing the good, the bad, and the ugly of opening a store credit card. See the following reasons that may or may not sway you to open a store card.

Grace periods can get you
Typical credit cards have a grace period between the end of a billing cycle and the date a payment is due, which allows consumers to make timely payments and avoid interest on their purchases. However, some store credit cards don't have a grace period, which means customers begin getting charged interest the day they make their purchase. Know the card's grace period before taking one out, or else you could get ripped off.

Know the promotional finance terms
With a good store credit card, you should have interest-free financing on new purchases, and if it does, the CARD Act of 2009 mandates it must last for at least six months. However, not all cards have this financing, so find out how much time you have to pay off your balance before accruing interest charges.

Know how high the interest rate is
While the average credit card interest rate is around 15 percent, store cards often carry interest rates of 20 percent or higher. When entertaining the thought of getting a retail credit card, you'll need to heavily consider your payment patterns — do you diligently pay your entire balance off at the end of each month? Or do you pay your statements off little by little? If you chose the latter, you'll find that using a retail card is nothing but a burdensome money guzzler.

There may be other ways to get a discount
If the sign-up offer is marginal, you can ask at the checkout person whether there are any other ways to get a similar discount. There are always sales going on, or promotions for the holidays. You can also often get the same discounts and sales by signing up for the retailer's online newsletter.

However, we know that the credit card route can be tempting because of additional discounts you may receive if you refer friends. So, if you're considering opening the card to reap the rewards and then closing it after, your credit score will be dinged, even if the card was only open for a short time.

Are the benefits worth it?
Retail cards all have different offers, some being more generous than others. For example, if you make a certain amount in purchases with the card, you may score free products or receive a nice discount. If you shop at this store frequently, it may make sense to use your transactions to rack up savings there.

However, typical credit cards offer a greater variety of rewards, such as hundreds of dollars cash back, points to redeem gifts from a myriad of merchants, or miles for traveling. You'll want to weigh these rewards to begin racking up the best incentives.

Can you use it everywhere?
It's important to make the differentiation between whether the card is a rewards card or an actual store credit card. There are also differences between a store credit card that is accepted universally, or one that comes with limitations. If the store card has a major credit card logo on it such as Visa, MasterCard or American Express, this signifies that it will be accepted by most merchants.

If you're thinking about using it in your everyday credit card rotation, compare the rewards from the retail card to your other credit cards, or potential credit cards you're looking into. If you constantly shop at that store, it may be worth it to apply for a credit card there.

Building credit with retail credit cards

There is some dispute regarding whether store cards can help or harm your credit score. If you're someone with a low credit score, retail store card issuers tend to be lenient when it comes to the credit profile of who they'll approve to take out a card, which means these cards may help you establish a higher credit score.

However, co-branded store cards, backed by a major card issuer, are less flexible and will typically only approve consumers with a high credit profile. Long-term, you can use a store card to heighten your credit score, if you pay your statements off in a timely manner. Keeping low balances will positively reduce your debt-to-limit ratio, which accounts for 30 percent of your credit score.

On the other hand, experts say that opening a store card account will lessen your credit score a few points because of the hard inquiry on your credit report that is needed to check your credit. Also, since store card credit limits tend to be low, it can be easy to quickly max out the card, which will ding your credit score because of your balance-to-limit ratio.

It seems that there is a fine line between building good credit with retail cards, and negatively impacting your credit score by using up the card's limit. As long as you make timely payments, your credit score should be stable.

With everyone being in the holiday swing of things, it can be tempting to take out a store credit card and receiving a percent off on the day's transactions. However, it's important to consider how the rewards will benefit you in the long-term.

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