The holiday season is in full swing, so you undoubtedly will be asked more than once whether you would like to open a store credit-card account and get a discount on your purchase.
My advice: Don’t. Or at least think twice before taking the plunge.
Unless this is your absolute favorite store in the whole world, it’s possible you will do more harm than good by sticking another piece of plastic in your purse or wallet. And store cards can come with some really ugly terms.
A recent study by CreditCards.com found that the average interest rate for store cards is about 24 percent, compared with a national average of 15 percent for all plastic.
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“With their outrageously high annual percentage rates, most consumers would be wise to steer clear of these cards unless they’re 100 percent certain they can pay their balance off every single month,” said Matt Schulz, the website’s senior industry analyst. “And even then, there are plenty of general-purpose credit cards with better sign-up bonuses.”
This isn’t to say you never, ever want to go near store plastic. If you’re making an exceptionally large purchase, the 10 percent or even 20 percent discount offered with many cards might be a real money saver.
Also, store cards can be a helpful way to rebuild credit. Approval is likely and, if you manage your balance responsibly, you will demonstrate to other lenders that you have mended your financial ways.
But if you find yourself falling behind in payments, you might quickly discover that a bad situation is growing progressively worse.
For most people, probably three of four cards is enough.
Matt Schultz, senior industry analyst for CreditCards.com
According to CreditCards.com, the toughest love will come from store plastic offered by discount retailer Big Lots, which charges a whopping 30 percent interest rate. The jewelry chain Zales is close behind with a 29.24 percent rate, followed by Staples with 28.24 percent.
“Store cards are only attractive when you absolutely, positively know you can pay off your balance every month,” Schulz told me. “Otherwise, you can get into a lot of trouble.”
He also warned “rewards junkies” not to go overboard with new store cards during the holidays. One or two cards for stores you frequent should be OK, Schulz said.
More than that during a short period of time and you will look like a greater risk to creditors.
That could lower your credit score, which in turn could increase your interest rates.
Another thing to keep in mind: credit utilization. This is the percentage of available credit you’re using, which is also a key element of your credit score.
Generally speaking, you want to keep your utilization below 30 percent of a card’s credit limit. In other words, if you have a limit of $5,000, don’t run a balance higher than $1,500 or your credit score could go down.
30 percent annual interest rate on a Big Lots credit card
Store cards typically come with lower credit limits than other cards – that’s a big reason they’re so easy to get. But that also means it’s easy to use up most of the available credit.
For example, carrying a balance of $300 on a store card with a $500 limit means you’re at 60 percent utilization, and that is a red flag for creditors.
Keep this in mind as well: Opening or closing lots of credit card accounts can be a signal to lenders that you’re an unreliable financial prospect. That. too. will take a toll on your score.
Schulz said people who can handle plastic responsibly – that is, who never carry a balance from month to month – can get away with as much plastic as they desire. But that’s not most people.
“For most people, probably three of four cards is enough,” he said.
Words of wisdom, those.