We’ve all been there. You’re shopping at Old Navy, J. Crew or Home Depot. You’re ready to hand the cashier your money. Suddenly, she asks if you’d like to sign up for a store credit card and save 15 percent right now.
Quickly, you do the math in your head. What’s 15 percent of $150? I could save a lot! I’d be so thrifty!
This is a question I faced recently as I stared at a screen full of expensive flights from Denver to Seattle for my cousin’s wedding. Should I sign up for a promotional airline credit card to save some money, I wondered? I decided to do a little research and find out.
Not going to lie, these store credit cards are pretty tempting. In fact, they’re designed to be tempting because retailers are now counting on your interest payments to help keep them afloat during this challenging period for brick-and-mortar shops (Here are 17 retailers closing stores as they struggle to keep up with Amazon).
So, should you sign on the dotted line? Or pass on the discount?
The answer, it turns out, depends on how good you are with your money. Here are some pros and cons of store credit cards.
Pros For Store Credit Cards
1. The sign-up discounts and other perks.
Many retailers offer a 15 or 20 percent discount on your first purchase. On top of the initial discount, maybe you get early access to sales or cash back for every dollar you spend at the store.
It goes beyond discounts—some cards, such as those offered by airlines, will straight-up offer you cash. Southwest was recently offering $200 for new cardholders, plus 10,000 airline miles.
2. Low-cost financing options.
Home Depot’s consumer card, for example, offers six months of interest-free financing when you sign up. That’s pretty sweet if you’re working on a costly home renovation project and don’t have cash to pay for the drywall, paint and tools outright.
3. They can help build up your credit history and credit score.
One of the components of your credit score is how many lines of credit you have, how long they’ve been open and if you make payments on time. If you only have a few credit lines, opening a store credit card (or any credit card for that matter) can help boost your score over time by showing the credit rating agencies that you’re good at paying off your debts.
4. They can be easier to get than other cards.
If you’ve got bad credit or no credit history, these retail cards are “a good point of entry for someone trying to establish credit,” Christopher Viale, board chairman of the Association of Independent Consumer Credit Counseling Agencies, told Bankrate.
Cons For Store Credit Cards
1. Super, duper high interest rates.
Many retailer credit cards carry interest rates that are twice as high as the average credit card—some charge up to 30 percent in interest. If you fall behind on your payments, you’re going to owe tons of extra money.
Lillian Esposito, a mother of two boys, recently told the New York Times that she estimated paying $25 in interest for every $100 she spent using several store credit cards. Think about that for a second—over time, that really adds up and will most certainly erase any of the discounts you saw when you opened the card.
2. You might regret making an impulsive decision.
A 2014 survey by Credit.com found that 31 percent of Americans felt bullied into opening a store credit card. Nearly 49 percent of survey respondents said they regretted opening a store card and 57 percent said they actually stopped going to the store where they felt bullied.
Bottom line: You shouldn’t be making important financial decisions in line at JCPenney with an arm full of clothes and a line of people waiting to checkout behind you.
3. They can lower your credit score.
I know, I know, we just told you that retail cards can boost your credit score. But they can also lower it and here’s why.
First, before you can get approved for the card, the company has to run what’s known as a hard check on your credit history. Each hard check automatically lowers your credit score, no matter what.
Second, if you turn around and use your shiny new card to buy a really expensive item (to make the most of the discount, duh), you’re going to carry a high balance for a while. When you have a high balance-to-limit ratio, your credit score can drop. Basically, the credit ratings bureaus don’t want to see that you’ve almost maxed out your card that has a limit of $15,000. They’d rather you have a teeny, tiny balance of $50 on that $15,000 limit.
4. You’re Propping Up The Struggling Retail World
The New York Times offered up this scary statistic recently: Store credit cards made up 39 percent of Macy’s profits in 2016. At Kohl’s, 35 percent of profits come from store credit cards.
As many of these retailers shutter stores, file for bankruptcy and layoff workers, your debts are literally keeping them afloat. In other words, the current retail crisis may be way worse than it seems.
“These stores are propping up their failing businesses on the backs of lower-middle-class people,” Charles Juntikka, a bankruptcy lawyer, told the New York Times.