Warning: Store card can sink your credit score

When the salesclerk asks if you'd like to save 15% on your purchases today, think hard before you say yes -- but also know that not everything that's tempting is sinful.

By MSN Money Partner Jun 11, 2013 12:39PM

This post comes from Deepa Venkatraghvan at partner site MainStreet.

MainStreet logoLegend has it that around the fourth century, a monk named Evagrius Ponticus defined "The Eight Temptations of Man." In the sixth century, Pope Gregory is believed to have modified this version and renamed the list as "The Seven Deadly Sins."

Woman swiping a credit card © Rubberball, Mike Kemp, Rubberball, Getty ImagesClearly it didn't take too long for temptations to become sins. The line was very thin to begin with. And that can apply to you and me even today -- especially with retail shopping.

There are several temptations in that world; end-of-season sales, deals-of-the-day, discount coupons, member specials and so on. They can quickly make you succumb to greed. But that one temptation, the store credit card that promises immediate money off on signing up, can lead you to succumb, not just to greed but to sloth as well. If you're not careful, you can end up paying more interest and can even damage your credit score.

If you get a store card with a $500 limit just because you want that 15% off and you max it out, your credit usage can go through the roof. That means your credit score is going to drop.

"This is one of the major downsides to retail store credit cards," said John Ulzheimer, the president of consumer education at SmartCredit.com. "Their limits are almost always very low and it's easy to heavily leverage the card even with modest purchases. Adding a 100% maxed out credit card to a credit report can certainly lower your credit scores. The good news is that her scores will rebound as long as she pays it off."

What else hurts?

Store credit cards are peculiar in their features. Apart from having low limits, they also carry high interest rates, usually upward of 20% APR. That means, if you fail to pay the full balance for even one month, the charges may cancel out any discount you received by opening the card.

Several things about store cards can also impact your credit score. The credit score mechanism assigns 15% to how long you've had credit. And this is based on the average age of all your cards. If you keep opening new store cards, it will bring down the average age of your accounts and negatively impact your credit score.

"When you apply for store cards, it means more retail store credit inquiries, which are among the most problematic for your credit scores," Ulzheimer added. "Add to that the fact that the new account can bring down the average age of your accounts and the low credit limits can make it easy to 'max out' your credit card -- all of these things can lower your scores, and when you combine them the impact can be significant."

Another hitch with store cards is that private label store cards (the ones that bear only the name of the retailer and not co-branded with a Visa, MasterCard or other card issuer logo) can be used only  in those stores. Having said that, many large retailers do offer co-branded cards in conjunction with Visa, MasterCard, American Express or other card issuers which can be used elsewhere as well.

The good in it all

Few things are all bad all of the time. And there is some merit in store cards as well

Store credit cards can make sense for stores that you frequent and have some loyalty toward," said Ben Woolsey, director of marketing and consumer research at CreditCards.com.

"For instance, a big retailer's private label store card offers 5% cash back, which is a very good reward for someone who shops there often. Store card membership also often provides advance notice of sales and closeout, which can provide added value."

Ultimately, having too many cards is not really the problem," Ulzheimer said. "It's how you manage them that can cause a problem."

So if you do shop a lot and think you would benefit from store cards, using them well will help. Don't be a sloth. Pay off your balances each month and don't revolve your credit.

The road to sin can be quick

Retailers are out there trying to tempt every dollar out of your wallet, and if your wallet's empty, they're willing to fund it for you with these attractive-looking store cards. The process for applying and getting a store card can be quick and easy. So it goes without saying then, that you ought to read before you sign.

After all, if it took just 200 years for Ponticus' temptations to be labeled sins, in today's high speed world, that's probably an equivalent of a few minutes.

More from MainStreet:


Same problem occurs with regular cards when the initial balance is the same and they won't allow you to even request a credit limit raise for a year. Moving from US to Canada and back and forth you would think that they would share credit information but they don't so you can have an established credit record in one country and have to start from scratch in the other even if you had a credit record there previously because it is not current. This is so you can pay the highest interest rates and have the most restrict lending practices which make the lenders more profit and reduce risk. To me it seems that there should be some legislation that requires them to recognize your credit history and lend accordingly. I myself always pay off the balance on my cards so giving me a low limit card will only result in reduced profits as they can only profit from the merchant transaction fess which are typically very low especially on commodity items such as fuel and food which is what I will typically use the card for.
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