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New store charge cards could negatively affect your credit score

Personal finance experts say it all depends on how you plan to use it

Paying with a credit card concept
Photo (c) boonchai wedmakawand - Getty Images
Consumers shopping in a brick-and-mortar chain store this holiday season may be presented with an offer at checkout: Apply for the store’s charge card and receive an immediate discount on the purchase.

It might sound like a tempting deal, but there are a few things to consider first. The financial services firm myFICO says opening a new store charge account could negatively affect your credit score.

It’s a card you may only be able to use at the store in question. Since it isn’t getting regular use, myFICO says it’s easy to overlook a payment, and late payments can drag down your credit score. The credit limit may also be fairly low, so if that first purchase uses most of the available credit – and you carry a balance for a while – your credit score can take a hit.

Higher interest rates

Ted Rossman, a senior industry analyst at CreditCards.com, says there can be other drawbacks that make store cards less useful to consumers than a standard credit card. For one thing, he says store cards typically charge a higher interest rate.

“We recently averaged the midpoints of the APR (annual percentage rate) ranges offered by credit cards associated with the 100 largest retailers and came up with 24.35%, well above the 19.92% we measured on 100 popular general-purpose credit cards using the same methodology,” Rossman told ConsumerAffairs. “Both are high, but retail card APRs are often higher than general-purpose cards, and they top out at 29.99%.

Getting a small discount probably isn’t worth it

Rossman says store credit cards can make sense if you plan to pay in full to avoid the higher interest charges. But another consideration is how frequently the card will be used. And he agrees that there can be negative consequences to credit scores.

“Opening and closing too many credit card accounts can hurt your credit score, so be selective,” he said. “A 10% discount on a large purchase might make sense if you can avoid interest, especially if you’re loyal to the store and will get ongoing benefits. A 10% discount on a smaller purchase isn’t really worth it.”

But when all these positive factors line up, myFICO says a store card can help consumers improve their credit score, just as a traditional credit card can. If the issuing bank reports the account to the major credit bureaus, the account should show up on your credit reports. 

The key, of course, is to make payments on the account on time every month.

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