Almost every time you make a purchase these days, the cashier asks if you would like to save money by opening a store credit card. She will often give you a long list of perks including discounts, special coupons, insider sales and even a gift on your birthday. While the store points out all the positives associated with opening a retail card, it is important to understand the whole picture and how it will affect your finances.
Here are five points to consider before you add a store credit card to your wallet:
What is the interest rate?
Most store credit cards have a very high interest rate ranging from 18 to 20-plus percent. Cards that offer a lower rate often have an increase written into the fine print or offer a variable rate. Carefully read all documentation to make sure that you know the rate that you receive now and down the road.
What is the credit limit?
Many of the cards have credit limits as low as $500 or $1,000, which on the surface many seem like a positive point. However, according to MyFico.com, 30 percent of your credit score is based on credit utilization, which is the amount of total credit available compared with the amount you have used. If you make a few purchases on your store card, then you may increase your credit utilization percentage, which can decrease your credit score.
How secure is the application process?
The clerk will often tell you that you can apply for the card while standing in line at the register and that it will only take a few minutes. But with identity theft a real concern, it is not a smart idea to share financial information in a public place. Before saying yes to the card, make sure you are comfortable with the application process.
Is there an annual fee?
Some stores waive the annual fee for the first year, so applicants aren't even aware of it until later. Fees can be $25 dollars or higher, depending on the perks offered by the card. If the card has great perks, then there is a high likelihood of an annual fee. Determine if there is an annual fee and if it can be raised in subsequent years.
What is the monetary value of the perks and discounts?
While the discounts and cash back may sound appealing, make sure that you are actually going to take advantage of the perks. If the card is for a store that you only visit a few times a year, then you probably won't earn enough points to make the annual fee worth it. Or if the highest savings comes through online purchases and you only like to shop in the store, then it might not be worth the impact to your credit score.
Applying for another credit card is an important decision that shouldn't be made on an impulse just to save 20 percent when buying a sweater. Before getting a store card, take the time to read the fine print and make sure that the benefits outweigh the risks.