With back to school shopping season in full swing, it can be tempting to sign up for store credit cards. You might save a few extra bucks on those binders and blue jeans today, but you could pay dearly for it later.
Why are retail credit cards so dangerous? They are designed to benefit the retailer first and foremost — not you. They may tempt you with a 10% off promotion, but when a business is selling a credit card that carries a 22.99% interest rate, it’s pretty clear who’s really winning in the end.
Here are five common myths about retail credit cards:
1. Your good credit will get you a lower interest rate.
Unlike traditional loans, retailers typically charge a flat interest rate to all borrowers, regardless of their credit score. If you’ve got decent credit, you’re better off getting approved for a traditional credit card, which will reward you with a lower interest rate.
2. 0% financing means they won’t charge me interest for the first year
Don’t believe those 0% financing offers. Oftentimes, the company is not giving you a free year of interest. They are simply deferring your interest for a year. If you have even $1 left unpaid on your card once that promotional period is over, they will slap you with the entire previous year’s worth of interest charges. This can be a nasty surprise.
3. Retail cards won’t hurt your credit score
When you apply for credit cards in store, do not believe it if they tell you it won’t ding your credit score. Retail credit card applications count as a hard inquiry on your credit and they will ding your score. Be especially wary of this if you’re going to be shopping for a new mortgage in the near future. Even a few lost points can result in a higher mortgage rate and cost you big money over time.
4. You’ll earn rewards anywhere you shop
Store cards are usually only good for one thing: rewards for that particular retailer. Unless you shop there on a consistent basis, you’re likely better off signing up for a rewards credit card that rewards you no matter where you shop.
5. I was approved, so that must mean I can afford this card.
Again, retail lenders are far more flexible when it comes to approving borrowers with bad credit. That’s because they want to approve as many people as possible. The more people using their cards each month, the more money they will earn over time. It’s up to customers to decide how much they can truly afford to spend on a retail credit card. Usually, it might be much less than your available credit limit suggests.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.
