Why You Should Never Open a Store Credit Card
Does this sound familiar: “would you like to open a credit card with us? You’ll receive a 10% discount off your purchase today.” Lately it seems as if every store we go to we get asked if we would like to open a store credit card when we are checking out.
While a discount is always enticing, you should never fall into the trap of a store credit card.
To put it bluntly, store credit cards are predatory and designed to keep you in the cycle of debt and make you pay back way more than you ever intended to spend.
That may seem harsh, but the average balance on a store credit card in America is $1,841. That is a lot when you factor in the astronomically high APR on these cards, and the insanely low minimum payments due.
Keep reading to find out exactly why you should avoid store credit cards, and what you can do if you are already trapped in the cycle of store credit card debt.
1. They have high interest rates
The average store credit card has an APR of 26.38%. To put that into perspective, the highest APR on our Visa Platinum card is 12.9% - about half of what the store card average is.
The interest accrued on these cards adds up – and fast. Furthermore, the “benefits” on these cards do not outweigh the cost of interest.
2. Deferred interest is a trap
Many stores like to reel in customers by saying that interest on the card will be deferred for a certain amount of time. At face value this seems like a really good deal.
What they don’t tell you is that if you don’t pay off your balance in full by the time your grace period is over, you will begin to accrue interest on what you still owe, and you will be charged interest retroactively from the purchase date.
This can end up being a pretty big hit to your wallet depending on how big your original purchase was.
3. The 10% savings they offer doesn’t really save you anything
Most stores will offer you a 10% discount off your purchase if you open up a store credit card with them. This can seem like a pretty good deal, especially on larger purchases where 10% can be a significant savings.
The problem is that unless you pay off the card in full before interest begins accruing, that 10% discount will quickly be eaten up by discount costs. If you take a longer time to pay off the card, you may even end up paying back more than the item was ever worth in the first place.
4. The minimum payments are tiny
At first, this may seem like a dream come true. Only owe $10/month on this card? Great!
When you pull back the curtain, you realize that paying the minimum amount means that you will be paying on the card for a long time and paying back a crazy high amount of interest.
For example, if you pay a minimum payment of $10 for a card with $200 at 26.38% APR (the average APR for a store credit card in America), then you will be paying back that card for 27 months and pay $66.42 in interest charges alone. That is a lot of time and a lot of extra money for a $200 purchase. The products purchased were probably not worth that much time, money, or hassle to pay it back.
5. They fuel you to buy things you don’t need
All of those card-holder only “perks” aren’t there to benefit you in any way; they’re there to get you to buy more from their store.
The stores might send you emails for special discounts and rewards, but as we said in a previous point, those discounts don’t save you anything in the long run. Every offer they give you is an attempt to get you to spend more money at their store and put it on their card so they can rake in the money from the interest charged.
6. It can wreck your credit score
When you open a store card, the company will do a hard pull of your credit history, which will affect your score. It is only a small bit and typically isn’t a big deal as the score will eventually bounce back. It becomes a problem if you are planning on taking out an auto loan or mortgage in the near future, as the lenders will be taking those hard pulls into account.
The biggest way these store cards affect your credit is that they skew your credit available to credit used ratio. This ratio makes up a whopping 30% of your credit score, as you can see in a previous blog post of ours. Since the credit ceiling on these cards is typically so low, it can negatively affect your credit score.
The key takeaway here is that you should just completely avoid opening a store credit card. Just remember that the initial discount is never worth it and you will be spending a lot more than you ever intended.
If you would like to open a credit card, open one with your local credit union. The rewards and benefits are there to help you, not hurt you. The interest rates are reasonable, the rewards actually help you, and you have the expertise of the credit union team to help you at every turn.
The difference between a store card and a credit union card is like the difference between a payday loan and a share secured loan. They essentially do the same thing in the short term, but in the long term, the former hurts you and the latter helps you.
If you currently have one or multiple store credit cards that you are struggling to pay off, make an appointment with a financial counselor to figure out the best course of action to suit you. POECU members can receive free financial counseling by calling (504) 885-6871 and making an appointment with Kristy.