Does the thought of going on a shopping spree now and paying for it later bring a smile to your face? You consciously monitor your spending, but when you see the latest smartphone hit the shelves, it's hard not to want it -- along with the latest tablet. While you're at it, how about that huge plasma TV you've been eyeing, even though you haven't been able to save enough to buy it?
Then a store employee comes up to you and mentions the store's credit card program, adding that she can get you approved in a matter of minutes. "You will also save 10 percent for signing up today," she tells you.
Well, saving 10 percent on your entire purchase justifies the shopping spree, right?
"Despite their potential to save you some upfront cash, retail store credit cards could be more of an enemy to your financial health than an ally," warns Scott Halliwell, a certified financial planner ™ professional with USAA. "As a matter of fact, there are actually a number of reasons you might want to avoid these cards altogether."
Check out the following information about store credit cards before you plunge into some retail therapy that could come back to punish you later.
1. They carry higher interest rates.
Unlike traditional banks, retail stores have a history of issuing credit cards to just about anyone. That makes it easy for most people to qualify, but it also means the lender will charge a higher interest rate to compensate for the greater risk.
"Many popular retail cards carry annual percentage rates of 15 percent to 20 percent or more," Halliwell says. "If you don't pay off your balance right away, you could easily wipe out any savings gained from your sign-up discount."
So if you're thinking about dropping $500 on that new TV and only making the minimum payment for 14 months, know that you'll probably be paying a lot more than $500 in the end.
2. They have the potential to lower your credit score.
To understand how retail credit cards could affect your credit score, let's use Kelly as an example. Kelly just discovered the instant gratification of buying a new wardrobe on a retail store credit card. Without the burden of having to pay for the clothes now, she ventures to the next department store, opens an account, and feeds her shoe addiction. She stops at two more stores and signs up for cards there as well. After all, she can pay off all her charges in a couple months then cancel the cards.
Not so fast.
"Opening multiple credit requests in a short period of time can really hurt your credit score, even if you close the accounts shortly thereafter," Halliwell says. He also adds that a low score may keep you from getting the best interest rate on more important purchases, such as a house or car.
3. They have a bad balance-to-credit-limit ratio.
Retail credit cards usually have a low limit, which means you could max it out quickly. You want to keep your credit use down; otherwise, your credit score could drop. Add temptation to the mix, and the distance between your balance and credit limit could be closer than you would like.
4. There can be exceptions.
Store cards often earn their bad reputation, but that's not to say they're always wrong for everyone. They can help a young person build a positive credit history -- provided he or she pays the balance in full each month. In addition, many stores offer their cardholders attractive shopping incentives. So if a store you frequent will give you special discounts for using its card, it may be worth considering.
"As with any credit card, just be sure the power of plastic doesn't entice you to spend more than you would if you were paying cash," Halliwell advises.