Do you have a store credit card?
We’ve all been in this scenario before: as you approach the cash register to pay for your purchase, the clerk tempts you with an additional 20 per cent off your purchase if you sign up for their store credit card. And even though you know you don’t need another credit card, and you rarely ever shop at the store, you can’t help but waiver just a little bit. After all, everybody likes saving money, right?
Store credit cards can be enticing, especially when they offer a deep discount on the initial purchase, a rewards program for frequent shoppers, or a “no payments” plan for a certain time period.
When I was 19 years old, I applied for a Sears card with a $500 credit limit. As a promotion, I received $10 off my first purchase, which might not seem like a big discount, but to a teenager making minimum wage, it represented over an hour’s worth of work. I also earned rewards for my spending – I’m pretty sure it was 2%. To me, this was the dream scenario. Not only did I work at Sears (and was able to get an employee discount, plus first-hand knowledge of sales), but I was also excited to have my own credit card. It made me feel grown up.
I thought I would be able to handle such a small credit limit, and I told myself if I ever made purchases on my Sears card, I would pay off the balance immediately at the cash register. But when Christmas came that year, I ended up maxing my Sears card in order to buy presents. And it wasn’t until four years later that I completely cleared the balance and canceled the card.
The Sears card was my first and last experience with a store credit card.
If you are a frequent shopper at a store, and are able to keep a zero balance every month, a store credit card can be a good way to save money. But for the rest of us, here are four reasons (from my own personal experience) why store branded credit cards are not a good idea:
High interest rates
Most of the time, a store-branded credit card will have an interest rate that is much higher than a regular card – with rates generally between 20 to 30%.
Additionally, store credit cards will often have a very tiny minimum payment, usually under three per cent. My Sears card had an interest rate of 29.90% and a minimum payment of $10 or one per cent of the new balance – whichever was greater.
You usually won’t benefit from the rewards program associated with a store-branded credit card unless you are a frequent shopper. For example, the Sears card offered a $10 gift certificate for every 1,000 Sears points earned. At a rate of 2 point for every dollar spent, there are plenty of no-fee credit cards available with similar, and more flexible rewards systems.
Forced to shop in one place
When I had my Sears card, I felt more of an urge to shop there because I knew I could put my purchases on my store credit card. Even if I could have found what I was looking for at a better price somewhere else, I didn’t have the cash to buy it at the cheaper price.
Your credit score
Even if you pay your balance in full every month, many different things can affect your credit score, and that includes opening and closing credit accounts. Receiving a small discount by opening up a store credit card is not worth the potential headache and problems you could run into if your credit score prevents you from getting a good mortgage rate in the future.
What has been your experience with store-branded credit cards?
Author: Krystal Yee
I’m a personal finance blogger and marketing professional based in Vancouver. I’m a former Toronto Star (Moneyville) columnist, author of The Beginner’s Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I’m not working, you can usually find me running, climbing, playing field hockey, or plotting my next adventure.