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On the Money

Applying for a store credit card? Make sure you consider the hazards

By Candice Choi
Associated Press / December 5, 2009

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NEW YORK - The offer could tempt anyone buying holiday gifts: Open a store credit card and save 20 percent on your purchase. The smiling sales clerk makes it sound like a no-brainer, and explains there are absolutely no fees.

What won’t be so eagerly volunteered is the high interest rate, or the impact applying can have on your credit score.

There are times when it makes sense to open a store card. Just be sure you know the pitfalls.

The risks
The first sign you should say no thanks? You’re weighing the decision at the counter or after stumbling across an online offer to “Apply Now!’’

Opening any line of credit comes with repercussions, and it’s not a decision you should make on a whim.

Of course, the one-time discount for applying is usually offered at check out. 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.

The credit score impact
Applications for new credit 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, another factor in your score. But store cards typically come with lower credit lines than bank cards, although the exact amount will vary.

The dip your score initially takes will likely outweigh any positive impact too. It’s only over time 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.

It should be noted that a store card may not impact your score as much as a bank card. This is partly because store cards are more limited in where and how they can be used.

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.

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.

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.

Candice Choi writes about personal finance for the Associated Press.