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shopping at a department store

The offer is tempting. If you apply for that credit card offered by your favorite department store, you’ll immediately qualify for a 20% storewide discount.

You already shop at the store. Why wouldn’t you fill out that application form?

There are actually several good reasons why you should resist, according to credit and financial experts, who say that having store credit cards often tempts consumers to purchase items that they don’t need. Store cards also come with some of the highest interest rates of all credit cards. And unlike traditional credit cards, they rarely come with the type of robust cash-back or rewards programs that can lead to free airline miles, hotel stays or merchandise.

Shay Olivarria, a financial speaker and the author of 10 Things College Students Need to Know About Money, says that store credit cards simply aren’t good options when there are so many traditional credit cards that offer rewards programs and lower interest rates.

“There’s nothing that you can buy on a store card that you can’t buy with a credit card,” Olivarria adds.

Higher Interest Rates and Other Problems

Olivarria says that the higher interest rates that come with store credit cards are an especially big problem. If you don’t pay your balance in full every month, the higher rates mean that your credit card debt can grow quickly every month if you continue to purchase with it.

According to a 2015 CreditCards.com survey, the average interest rate attached to store credit cards came in at 23.43%. That is far higher than the 15% national average interest rate for all credit cards.

According to CreditCards.com, a consumer who carries a $1,000 balance on a store credit card with an interest rate of 23.43% and makes only the minimum required monthly payment would take 72 months to pay off the balance and spend an extra $838 on interest. And that assumes that the consumer isn’t adding to the balance by making more purchases on the card.

There are also other problems with store credit cards, and the temptation to spend more is one of the bigger ones. Elle Kaplan, chief executive officer and founder of New York investment firm LexION Capital Management, says that the discounts and special offers that come when opening a store credit card often tempt consumers to use these cards for purchases that they either wouldn’t have otherwise made or would have paid for with cash.

Then, at the end of the month, too many of these consumers have to prioritize their credit card payments. They’ll pay off their major credit cards – their basic Visa, MasterCard or Discover cards – first. They’ll then make only the minimum payments on their store cards, meaning that the balance on these cards will continue to rise each month if they keep charging items.

“Couple this with the exorbitant interest rates of store credit cards, and you have a recipe for disaster,” Kaplan says.

Kaplan recommends that instead of using their cards, consumers rely on cash to make department store purchases. If you want to go on a shopping spree, hit your local ATM and withdraw the money to cover your purchases. If you don’t have enough cash set aside in your budget, hold off on buying until you’ve saved the money.

“Swiping a credit card doesn’t have the same psychological effect as taking cash out of your wallet, so it’s easy to let your spending spiral when you use a card,” Kaplan says.

Not Inherently Bad

This doesn’t mean that using store credit cards is always a bad idea. If used properly, there’s nothing inherently wrong with store-branded cards, says Liran Amrany, co-founder and chief executive officer of New York-based Debitize, a tech start-up that allows consumers to use their credit cards as if they were debit cards.

“Store-branded credit cards, like any other credit card, can help you save money and build credit when used responsibly,” Amrany says.

Using a store card responsibly means only charging what you can afford to pay back each month and then paying the bill in full by every due date.

This way, you can take advantage of any savings at stores where you’d shop during the month anyway without having to worry about the high interest rates usually attached to store cards.

“I personally save hundreds of dollars a year by taking advantage of special offers for cardholders,” Amrany says.

Amrany does have a warning: Because consumers often use store credit cards sparingly, it’s often easy for them to forget that they have a balance on them. This could inadvertently lead to missed payments, which will send your credit score plummeting.

Amrany suggests that you sign up for autopay on these cards to avoid this problem.

A Way to Build Credit

William Frazier, credit coach with Clean Slate Credit in Montgomery, Alabama, says that store cards can be a good option for consumers who don’t have much of a credit history. These cards are usually easier to get than other cards. Consumers who then use their store cards wisely can quickly boost a low FICO credit score, Frazier says.

This makes sense. According to myFICO.com, 35% of your FICO credit score is made up of your payment history. If you pay your credit card bills on time every month, including a store card bill, you can steadily make a dramatic improvement in your score. An additional 30% of your credit score is made up of your available credit. Again, having a store credit card can help here. Say you open a store card with a credit limit of $3,000. You’ve now boosted your available credit by this amount, something that will have a positive impact on your score.

However, Frazier added that store cards come with potential pitfalls.

“Just like the iceberg that sunk the Titanic, there are bigger consequences hidden under the surface after you sign up for the card,” Frazier says.

One of the bigger issues? Many store credit cards will automatically close if you stop using them for several months. This hurts your credit-utilization ratio, another important factor in determining your FICO credit score. Your score will be higher if you are using less of your available credit. If you use more of your available credit, your score will fall.

Here’s an example: Say you have four credit cards with a total credit limit of $10,000 and you have outstanding credit card debt of $3,000. But if your store credit card with a balance of $3,000 suddenly closes, you are now using $3,000 of an available credit limit of just $7,000. That’s not as good for your credit score.

Learn more about how to manage your credit score and debt by reading the Zing Blog’s guide to managing credit like a pro.

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