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Store credit cards - weighing the pros and cons

The offer could tempt anyone buying holiday gifts: Open a store credit card and save 20 percent on your purchase. What won't be so eagerly volunteered is the high interest rate, or the impact applying can have on your credit score. Store cards are also limited and shouldn't be confused with cards that carry Discover, Mastercard or Visa logos and can be used wherever those cards are accepted. There are times when it makes sense to open a store card. Just be sure you know the pitfalls.

THE RISKS

Opening any line of credit comes with repercussions, and it's not a decision you should make on a whim. The one-time discount for applying is usually offered at checkout. But is $20, or even $50 or $100, worth putting your finances on the line? Ideally, you'll decide whether you want a store card before you start shopping.

One factor to take into account is whether you're prone to carrying a balance. Store credit cards often come with high interest rates, so any discount you get upfront could quickly be erased.

Consider the J.C. Penney card, which has an interest rate of 23.99 percent. The high rate is typical of store cards, and the reason people end up forking over so much money in financing charges, said Greg McBride, an analyst with BankRate.com.

Applications for new credit, whether it's a store or bank card, can lower your score. This is especially true if you open several cards in the span of a few months. So you're not beating the system if you open an account just to get the discount, then cancel it soon after.

Given this tight credit environment, you might also be tempted to open a store card as a way to boost your credit line (which is another factor in your score). But store cards typically come with lower credit lines than bank cards, although the exact amount will vary depending on your risk level.

The dip your score initially takes will likely outweigh any positive impact too. It's only over time that your score will reap the benefits of the higher credit line, said Craig Watts, a spokesman for FICO, the company that produces the most widely known credit scores. And that's assuming you make payments on time.

THE REWARDS

Retailers offer a variety of deals for store card holders. They usually come in the form of discounts on purchases above a certain threshold or during a set time period.

Sears, for example, runs promotions where cardholders get 15 percent off on apparel on certain dates. At J.C. Penney, cardholders are occasionally mailed scratch-off discount coupons. Kohl's lets customers who charge at least $600 a year pick six "personal sale days."

The perks may sound similar to rewards cards, but there's an important difference. With traditional cash-back rewards cards, you get rebates on purchases you make anyway. With store cards, the deals are intended to get you to spend more.

So if you have trouble sticking to a budget, you might find it hard to resist the discounts. You might also not want another card to track.

All that said, store cards can work to your advantage if you're a regular shopper and capitalize on the year-round discounts. There may even be small perks, such as free shipping on certain orders. If you ultimately decide it's worth opening an account, take advantage of the initial discount by signing up when you make a big purchase.

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