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We've all been checking out a department store ready to pay when the cashier smiles and tells us we can save 25% if we open a store credit card. The offer can be tempting, especially around the holiday season when that 25% could mean big savings. The instant savings may be great, but is getting a department store credit card a good idea for your long-term credit goals?
If you are looking into buying a home, you know that every credit decision you make is important. Not only will your credit score be looked at, but the underwriter will look at your credit history and will pay special attention to recent activity. So let's take a closer look at whether you should take the friendly cashier up on her offer.
The Good
The most obvious benefit of store credit cards is the loyalty programs that come along with them. Many times you will be offered a substantial discount with your first purchase and then smaller discounts on your subsequent purchases. These savings can really add up if you open a credit card at a store that you visit frequently.
Additionally, store credit cards are usually much easier to get approved for than a standard credit card. This can be great if you are looking to increase your available credit to improve your credit utilization ratio. However be aware that most store credit cards do not come with a high credit limit (at least initially), so the impact will be minor. And don't go thinking that you can open up a card at each of your favorite stores and increase your available credit by thousands. Opening many credit cards at the same time will send off big red flags to your mortgage underwriter and could jeopardize your ability to obtain a loan.
The Bad
Store credit cards are well-known for having some of the worst interest rates in the industry. With rates often upwards of 25%, the finance charges can add up fast. If you are not paying off your balance in full every month the interest charges on your purchase will end up costing you more than you saved in the first place.
Now that we've explored the good and the bad, here are some tips to guide you if you do decide to open a store card:
- Look for cards that offer special financing. These cards often give you 6-12 months to pay off your purchase, interest-free.
- Don't open more than one card at a time. If you really want to get a store card, choose ONE store that you frequent the most and get a card there.
- Pay off the balance in full every month. Credit card companies will not charge you interest on your purchases if you pay the entire amount off every billing cycle. This will eliminate the problem with the high interest rate and maximize your savings.
- Do not charge up the balance on your card. Not only does this increase your credit utilization, lowering your score and sending negative messages to your lender, it also makes it harder to make the monthly payments. Your monthly amount due is based on a percentage of your total balance. The last thing you want to do is get your balance so high that you can not afford to make the monthly payment.
- Pay your bill on time. It may be hard to keep track of everything in the hustle and bustle of the holiday season, but just one late payment can wreak havoc on your credit report. In addition, the bank may raise your interest rate if you are late. Take steps to ensure you don't forget about your payment. If the company offers mobile reminders for your due date, say yes. Also choose carefully with how your bills are delivered. If your email is bogged down with thousands of emails, opt out of paperless billing so the bill doesn't get lost. Conversely, if you are always online and constantly checking your email, paperless billing may be the way to go.
While store credit cards may offer tempting discounts and rewards programs, often you can find better rates with bank credit cards. Many bank cards have great rewards programs as well. Whichever card you choose, understand how your credit choices can affect your score and take steps to stay on track.