Store Credit Cards: Why You Need to Read the Fine Print
Store Credit Cards: Why You Need to Read the Fine Print
I’m sure you’ve heard the phrase, “You have to spend money to make money,” but that’s backwards.
You need to make money to spend money, or the cycle of debt can trap you forever, and that’s no exaggeration. Even though 2 in 10 people use more than 50 percent of their income to pay off debts, 1 in 10 Americans believe they’ll be paying off their debts for the rest of their lives according to a Northwestern Mutual survey in 2018.
The average American has $123,800 in debt according to the Federal Reserve’s 2016 Survey of Consumer Finances. So let’s examine one of the easiest ways we build debt and ruin our credit scores: store-based credit cards.
If you think this doesn’t matter because you’re too young, you’re wrong.
You won’t be eligible to have your own credit card until you’re 18, but the sooner you learn smart money management, the better habits you’ll develop for yourself and the happier you (and your wallet) will be.
Because the language can be overly complicated and often tucked away in pages and pages of fine print, make sure you check out our article “Plastic Power“ for a quick guide on common credit card terminology.
What are store credit cards?
Even if you don’t have any store cards, you’ve probably been offered one. If a cashier ever mentioned saving 10-20 percent on your purchase that day with a store card or a membership, you’ve gotten the pitch.
Most retailers (Macy’s, Best Buy, Target, etc.) offer cards with their company’s name on it as a discount on current and future purchases. Items that cost $600 without a store card could receive a 20 percent discount and suddenly only cost $480 with a store card.
They exist for online platforms too. Amazon offers the Amazon Prime Store Card, boasting immediate access to a $60 gift card and 5 percent cashback on Amazon purchases.
Who are these cards for?
Store cards are available to anyone over 18 with a few exceptions, but young people and people with poor credit are especially drawn to them.
They’re often referred to as “store cards” or “membership cards” without specifically mentioning that they are, in fact, credit cards. Some people open accounts without even realizing exactly what is happening.
These cards require a lower credit score than most traditional credit cards, so even those with poor credit or no credit are likely to be approved. They have lower credit limits as well (typically less than $1000), based on your credit history.
That sounds great. What’s so bad about discounts?
Discounts are great, and saving on purchases you already planned to make is generally never a bad idea. No matter what retailers call these credit cards, they’re still precisely that: credit cards.
Two factors distinguish store-based credit cards and traditional ones though.
- You’ll only be able to use your store-based card at that specific store, meaning the benefits only exist within their offerings.
- They have a much higher annual percentage rate (APR), meaning the interest you’ll pay on unpaid balances is much higher.
They come with terms, conditions and a contract that people legally commit to. When you purchase an item on a credit card, you’re expected to pay that price by a certain date, otherwise interest is added to your statement balance, increasing the amount of money owed at the next due date.
Stores encourage you to get these cards by offering discounted prices, cashback rewards or promotions for 0 percent APR or 0 percent interest for a time period (6-12 months). They’ll do this as you’re checking out, hoping the price difference before you pull out your own card gets you to agree. What stores fail to point out as enthusiastically are the consequences you’ll face if you don’t pay back the money you owe before your next billing cycle (typically every 30 days).
Even the previously mentioned Amazon Store Card promotes the deals you’ll receive in multiple spaces in large font and neglects the 27.99 percent APR you’ll incur on any remaining balances at the end of the promotional period outside of one little line within the terms and conditions.
Let’s go back to our $600 purchase discounted to $480. If you don’t fully pay the $480 balance after the promotional period ends, your next balance could be $615. Then it’s $780. Then it’s $1000.
So long as that cycle continues, suddenly your $600 purchase becomes a $5,000 charge even if your credit limit (the amount you’re allowed to spend in one billing cycle) was initially set at $750.
In fact, let’s talk about credit limits…
Your credit limit doesn’t stay low for long. If you show the store that you pay your balance on time, especially in full, they’ll increase your credit limit, hoping you increase your spending.
Knowing your spending habits, stores will send you targeted advertisements and deals for products. They hope this will encourage you to return to the store and buy more stuff at a “discounted” price.
The relationship between the money you owe and your total credit limit is your credit utilization. This number impacts your credit score. Higher utilization rates imply you don’t have the funds to pay the debts you own. That can tank your credit score, which heavily impacts your ability to buy big ticket items (cars, apartments, homes).
How can I protect myself from mountains of debt?
So, whether you’ve decided to get your first store credit card, or your fifteenth, remember these suggestions:
- Start saving right away.
The best offense is a good defense, and having extra funds before you start accruing debt helps in creating a solid payment plan. When it’s finally time to make payments, you’ll be happy to know you have the funds to pay your debts completely.
- Don’t accrue debt!
Pay your balance in full as soon as you can. Otherwise, your balance will continue to grow and grow. If that happens, you may find yourself in a much stickier financial situation months later.
- Don’t spend more than you earn.
By the time your statement balance is due, you’ll find yourself accruing debt without a way to pay it off.
- Always know what you’re signing up for.
If something sounds too good to be true, it probably is! Be sure to see if there’s a promotional period, and what happens after that period ends. Ask questions. Find out what you’re committing to before you sign anything.
At the end of the day, store credit cards just fuel the capitalist machines persuading us to buy more stuff that we don’t actually need.They encourage us to think about the benefits we’ll get immediately, but hope we forget to consider the consequences. And if the average American is any indication, we often do.
Don’t get the card. Don’t sign the agreement. You don’t need it. Any “deal” pressuring you to commit as you’re about to leave is banking on you acting without thinking. You’re smarter than that.
DON’T FALL FOR THE TRAP