Why store credit cards can ruin your credit score
If you are a frequent shopper at a certain store, you may be tempted to apply for a store credit card. After all, you may be offered a discount on your purchase when you open the account, followed by discount cards, birthday rewards and shopping points with every subsequent purchase made at the store. While these incentives are certainly attractive, they do come at a price that can end up damaging your credit score.
Higher interest rates
Most experts recommend that you only have about two credit cards, and that those credit cards be with major companies, like Visa or MasterCard. These major credit card companies usually offer lower interest rates than store credit cards. Even though a store card may offer an introductory discount rate of around 10 percent, its interest rate may rise to over 20 percent. If you carry a balance on the card, this will make your payments substantially higher.
Lower credit limits
Another thing to consider when applying for a store credit card is that it may offer a lower limit than a major credit card. This works against you if you tend to charge a lot of items and carry a credit balance. Part of what determines your credit score is the ratio between your outstanding balance and your credit limit. So if you aren’t paying off a store card each month, your balance can become dangerously close to your limit, which makes you susceptible to a lower credit score.
Potential extra costs
If you do sign up for a store credit card, be sure to pay it off each month on time and in full so you don’t end up paying sky-high interest rates. For instance, many furniture stores will give you an interest-free grace period upon signing up, but make sure you pay the complete amount you owe by the end of that period. Otherwise, that new sofa you buy will cost more than you bargained for, and you could end up with a bad mark on your credit report.