If you’ve been to a department store recently, you’ve likely been confronted with the question, “Would you like to save an extra 15 percent on your purchase today?”
Being the bargain-conscious shopper you are, you probably said, “Sure.”
And that’s how it starts
Department store credit cards have become such a part of our shopping experience that we hardly give them a second thought.
However, store credit cards are a great way for retailers to get you coming back to buy from them. If you’re choosing between two stores and have a card for one of them, you’ll likely shop there.
But are store cards as good a deal for consumers as they are for the retailers?
The most current data shows the average interest rate for credit cards is a little more than 14 percent. But interest rates on department store cards can run as high as 29 percent, with the average being in the mid-20s. If you encounter this, you might want to look for a low APR credit card instead.
This difference in rates is partly due to the increased level of defaults on store cards over regular credit cards.
But why is that?
According to independent credit card expert Beverly Harzog, most store credit cards have less stringent approval requirements than regular credit cards. This means more people qualify for them, even if they probably shouldn’t.
In addition, people tend to carry more store cards than they do standard credit cards, making the chance of defaulting on one or more of them higher. With a higher default rate, the stores must charge higher interest to offset the losses from higher defaults.
So are store credit cards inherently evil, and should we avoid them entirely?
Not exactly, says Harzog. “The high interest rates are risky, but for someone who’s responsible, a store card can be a great way to start using credit.”
She advises using the card sparingly and paying off the balance each billing period. By doing this, you build credit and avoid the interest charges altogether.
A last piece of advice is to not go overboard with acquiring store cards. One or two during a six-month period is all you should apply for; every time you apply for one of these cards, it generates a hard inquiry on your credit report, which can negatively affect your credit score.
If you’re looking to build your credit score up, then one or two cards you pay on time should do the trick.
Source: money.usnews.com. Photo source: quizzle.com.
Editorial Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.