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5 Ways Store Credit Cards Can Hurt You

Store credit cardsHave you ever signed up for a store credit card just to get a discount on a purchase or to get 0% financing for 12 months? We see it every day at stores like Ikea, Sears, Home Depot and The Brick.

On any given day, a sales associate could ask you if you want to save an additional 10% by opening a credit card account. Customers are especially prone during the holiday months, to sign-up for store credit card offers, to get discounts on all of the gifts they’re buying. But remember, the bank behind the store credit card is in it to make a profit, and there are real risks to using these cards.

Here are 5 things to be weary of.

1. Store credit cards charge a much higher interest rate than regular MasterCard or Visa credit cards. While a standard card, like the Sears MasterCard charges 19.99% interest, the Sears store card charges 29.99% interest! Obviously if you pay of your balance at the end of the month, interest shouldn’t be an issue, but as we know, and the banks count on, many do not.

2. It’s in the fine print, but more and more store credit cards are charging an annual membership fee. Take the Ikea credit card for example, it charges a $21.00 annual membership fee. Even if you pay off your balance at the end of the first month, you’ll still be charged the membership fee. So if you took out the Ikea card to make a $200 purchase, it already cost you 10% in fees, before the 29.99% interest rate even kicked in!

3. Don’t get fooled by balance insurance. It’s useless. In fact, it’s so useless they’ve made it illegal for banks in the United States to sell it to credit card holders. It costs a fortune and very few people ever ending up using it, that’s why it’s so profitable for the banks. In fact, on a $800 balance, it would cost you $19.71 a month in interest only charges, but if you took out balance insurance it would cost you $28.17 per month. That’s the equivalent of 42% of your interest costs going to balance insurance!

4. 0% for 12 months isn’t always 0% for 12 months. Very few offers are more tantalizing than a 0% interest offer for 12 months. But remember, many banks require that you still make the interest free monthly payment each month during the 12 month promotional period. Guess what happens if you’re late on one payment in month 11? The banks will not only end the promotional rate, they will charge for each of the previous 11 months at the normal interest rate of say 29.99%! So buyer beware.

5. Applying for multiple store credit cards during a short time period (like the holidays) to get store discounts can damage your credit score. According to Equifax, one of the factors that is used to calculate your credit score is how often you seek credit. The more you seek credit, the higher the risk you appear to banks, as a result your credit score will be lowered. If it is, you could see the interest rates of some of your other loans rise, as some lenders reserve the right to adjust interest rates if your credit score deteriorates, and their perceived risk increases.

If you do have a store credit card, and you’re carrying a balance you can’t pay off right away, we would definitely recommend you transfer your balance to a 0% balance transfer card. You’ll go from paying 29.99% interest to 0% for 12 months.

4 comments

  1. Cancelling your first card meaning your “oldest” card will, most definitely HURT your credit score. Average credit age does play a factor in your score. Having an inactive card won’t hurt you, but closing it would.

  2. Oh, get rid of the Sears card but watch out because they’ll tell you if you paid off your statement, it’s not your “Main Statement” and still owe them money. F-ing shameful and greedy that they have to squeeze a few more dollars out of people. Worst card company paired up with an even worst retailer. Cut your losses, because that store is going to be nothing but a bad memory soon enough.

  3. My first Credit Card is Sear card and I read in some article that we should not cancel the first card as that will effect my credit rating if I cancel. I’m not using this card and I don’t know what to do. Pls suggest

    • Hi Joe, cancelling your “first” credit card per se, will absoultely not affect your credit rating. If you’re no longer using it, and feel more comfortable cancelling it, go ahead and do so. We would just recommend the following: make sure you have at least 2 credit cards in your wallet from different banks, and make sure your total credit card loans outstanding do not exceed 30% of your credit line. Hope that helps.

      Greedy Staff

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