Store credit cards: How to get the most out of them during the holidays
January 8, 2019
This article was featured in USA Today on November 20, 2018
When you’re shopping for the holidays, it’s nearly inevitable that a cashier will ask if you want to sign up for the store’s credit card. Whether you should depends on your financial discipline.
Three-fourths of Americans have at least one store credit card in their wallet, according to a recent survey from CompareCards.com. But nearly half of them regret it.
“People make bad decisions when they are pressured into things and that’s what happens a lot of times at the checkout counter,” says Matt Schulz, chief industry analyst at CompareCards.com.
Instead of signing up on the spot, take a brochure or research the card online later, so you know the terms and perks. If you still like the card, you can apply for it again the next time you’re in the store.
Here’s what to know:
Weigh the benefits
Sign-up bonuses: One of the biggest card incentives retailers dangle is a hefty discount or reward on your first purchase. For example, you get 30 percent off your first purchase with a Kohl’s charge card, plus another 15-percent discount once you receive the actual card. REI will give you a $100 gift card after your first purchase.
“This can make a difference if you’re shopping on a budget,” Schulz says, “but the key is being able to pay off that balance at the end of the month.”
You may also get early access to sales, special promotions or invite-only events. Other cards allow you stack discounts. “If you have the Target Red card, which is 5 percent off, and a coupon for 10 percent off, you get both discounts,” says Bill McCracken, president of Phoenix Synergistics, a financial services research company.
For example, you can earn 4 percent back on gas, 3 percent on restaurants and travel and 1 percent on all other purchases with the Costco Visa card on top of the 2 percent back you get on purchases made at the warehouse club chain.
Credit building: Younger people with no or little credit history can use retail cards to build their credit. Typically, it’s easier to qualify for a store credit and there’s usually no annual fee to pay. Additionally, these cards come with smaller limits than regular credit cards, providing a brake if your spending gets out of control. If you manage the card responsibly, “that opens the door” for more credit access, McCracken says.
High APR: The average annual percentage rate for a store credit card is almost 25 percent, according to CompareCards.com, compared with 16.5 percent for regular credit cards. That rate can quickly get you in trouble if you bust your budget.
“The truth is the average store credit card is so high that if you carry a balance or can’t pay off a purchase at the end of month, it’s not worth getting,” Schulz says.
Special financing: Nine out of 10 store cards offer so-called special financing offers often with deferred interest, according to CompareCards.com. This usually means that if you pay your balance off within an introductory period — say 12 months — then you won’t be charged interest. But if a balance remains after that period, you will be charged all the interest that would have accrued from the time you made the original purchase.
Credit score impact: Applying for a store card can hurt your credit score in three ways, according to John Ulzheimer, a credit expert who formerly worked at Equifax and FICO.
- Hard inquiry: The store will pull your credit report as part of the approval process. This inquiry can hurt your credit score.
- Credit age: A new account can lower the overall age of your credit accounts in your credit history, another ding to your score.
- Utilization: Store cards typically have low limits. Using a large portion of that available credit can lower your credit score.
“When you look at the cumulative effect of all three metrics you begin to question whether opening the account was worth saving a few dollars on your purchases,” Ulzheimer says.
A store card can be a great way to stretch your gift budget by 10 percent or more this year. But with any credit card, you should only sign up if you consistently stay within your means and pay your bills on time. Stick to stores you frequently visit or expect to use judiciously for your gifts this year.
“If you use it for most of your holiday shopping, maybe take some scissors to it in January,” McCracken says.
Best store cards
Here are five store credit cards to consider this holiday season. The top ones come from CompareCards.com’s list of best store credit cards for October 2018.
Amazon Prime Rewards Visa Signature Card
- You earn 5 percent back at Amazon.com and Whole Foods Market; 2 percent at restaurants, gas stations and drugstores; and 1 percent on all other purchases.
- New cardholders receive a $70 Amazon.com gift card after approval.
- There is no annual fee, but you must have a Prime membership, which costs $119 a year, to get the rewards rate. If you don’t renew your membership, you’ll be downgraded to the Amazon Rewards Visa Signature Card with a lower rewards rate.
Target REDcard Credit Card
- You get an instant 5 percent discount on Target and Target.com purchases at checkout. Other cards often require you to redeem rewards or points later.
- This card has no annual fee, and you receive exclusive card benefits, such as early access to special events, free two-day shipping, extended returns and more.
- You can only use this card at Target stores and online at Target.com.
TJX Rewards Credit Card
- You earn 5 points for each $1 you spend at T.J.Maxx and its partner stores: Marshalls, HomeGoods and Sierra Trading Post stores and online at tjxmaxx.com or sierratradingpost.com.
- New cardholders get 10 percent off their first online or in-store purchase. Rewards certificates you earn can be redeemed at T.J. Maxx and its partner stores.
- If you want to earn rewards outside the retailer’s stores, you can sign up for the TJX Rewards Platinum Mastercard.
Lowe’s Advantage Card
- You get 5 percent off eligible Lowe’s purchases at checkout. This card also has no annual fee.
- You can benefit from the everyday discount or take advantage of the card’s special financing benefit.
- The special financing offer and discount can’t be combined. The special financing offer is not available for purchases less than $299.
Costco Anywhere Visa Card by Citi
- You earn 4 percent cash back on gas for the first $7,000 per year and then 1 percent after that; 3 percent on restaurants and travel; 2 percent at Costco and Costco.com; and 1 percent on all other purchases.
- To earn the rewards rate, you must have a Costco membership, which costs $60 a year for the basic Gold Star level.
- The cashback reward is distributed only once a year after your February billing statement closes.