When it comes to back-to-school shopping, everyone’s looking for a bargain—but if the cashier offers you a big discount for taking out a store credit card you might want to turn it down.
Store-branded cards can come with poor terms, low limits that can hurt your credit score, and high interest rates that can more than wipe-out your discount for signing up on the spot. They also can tempt you into blowing your back-to-school budget, and not just because suddenly gaining more available credit might tempt you to overspend, warns Gerri Detweiler, author of Reduce Debt, Reduce Stress and education director at the credit site Nav.com.
“It’s easy to spend more than you realize if you’ll be spreading out purchases among different cards and payment methods,” Detweiler says. “It’s easy to lose track of how much you’ve spent overall.”
Damage to Your Credit Score
Store cards also can ding your credit score. Because retailer cards have low limits, even modest purchases can eat up most of your available credit. That raises your credit utilization ratio, which lowers your score and can cause you to pay higher rates on everything from mortgages to auto insurance. Example: If you charge $600 on a card with a $1,000 limit, you’re utilization ratio is 60%—double the 30% rate recommended to maintain a good credit score.
Signing up for a store card at the register also means you’re not reviewing all the card terms, including the interest rate, fees, grace period and more. If you know you’ll be doing major spending at one store, look up any card offers before you go—including the terms and conditions.
No Balance Act Here
Finally, make sure you’ll be able to pay off any balance on a new store card right away. Close to half of store cards carry annual percentage rates of 25% or more, according to one survey, more than 50% higher than the national card average. Paying those charges over time will cost you dearly, notes Beverly Harzog, credit card expert and author of The Debt Escape Plan.
“If you carry a balance, you’re not getting a deal,” Harzog says. “You’ll paying more for back-to-school clothes than you would’ve ever dreamed.”