How Applying for Store Credit Cards Can Affect Your Credit

Applying and obtaining store issued credit cards can appear very tempting while at the sales counter of your favorite store, especially around holidays. The sales associate will make them seem very appealing in a very short and abrupt sales pitch to get you to sign up for their line of credit before you can actually read all of the fine print that always accompanies any kind of credit offer. Their main goal is to have your signature on the sign up form before you can mathematically figure out whether you can afford another piece of plastic in your wallet. Before giving in to the temptation, weigh the pros and cons of their offer to avoid damage to your credit rating.

As far as store issued lines of credit, the cons outweigh the pros by about 75%. The lure of the sales associates offer is savings on store purchases off the regular retail price. But if you do some math, those savings really aren't savings at all. If the card offers a discount of 15% of your total purchase price but charges 25% interest on the charges incurred, how are you saving any money? Of course, if you pay off the balance before the interest is charged to your account, you will save. But taking the chance that funds will be available to make the payments certainly isn't very good personal finance control. Generally speaking, if you don't have the money in the bank to pay for large purchases now, you probably won't have it thirty days either. Bank issued credit cards are designed for that purpose. They offer a much lower percentage rate for larger purchases and you are agreeing to pay the extra in interest to be able to buy more expensive items than you can afford at one given time. So, a higher interest rate on store cards would definitely be in the con column.

Another consideration to store issued credit cards is the damage they do to your credit rating. The lenders that back the store's cards are working a numbers game. They are certain that a good percentage of the cardholders from a particular store will make the payments on the cards to improve their credit score. So their guidelines of acceptance are more lenient than banks to obtain customers. That fact alone hurts your credit score by as much as twenty points per store card you obtain. The credit reporting agencies know it's easier to get one of these cards and actually penalize your score for having one. Maybe in the long run, when payments are made on time, it will improve your score but are you willing to take that chance?

The financial institutions that back these cards may not be the most reputable of companies as well. It can be compared to buying a new TV from a big box store with a great warranty and getting a really great deal from a guy in a dark alley way. Either way, you have a new TV but what happens when something goes wrong with it? Bank issued cards usually are very straight forward with their terms of use for their cards. Store issued lenders have a way of hiding extra fees and compounding the interest rates for late payments that you may not even be aware of until it's too late.

There are some advantages of store issued cards if they are used responsibly. Many will offer coupons, bonus points and inform you of an upcoming sale before the general public is told about it so you can plan ahead for a special purchase. According to many cardholders, the bonus points seem to be the best perk for a store issued card. But, once again, if you're unable to pay off the card before the interest is being applied to your purchases, you are not saving any money and you might be digging a deep hole to bury your credit rating in.

The bottom line is this: only you know what your budget is. If you would like to have a store issued line of credit, get just one, maybe two for your favorite stores and only use them if you're certain that the balance can be resolved before the interest piles up and you find that making the minimum payment is difficult. Or better yet, check with your bank and see if they will issue a "secured" line of credit. In the long run, dealing with a reputable bank will build your credit more than a store bought card can hurt your credit score.

Sources:

*Cap, Five Reasons to Stay Away From Store Branded Credit Cards, StopBuyingCrap.com

*Bankrate, "How many credit cards is too many?", MSN Money Central