“Sign up now and you’ll get 20% off your entire purchase!” Sound familiar? Many retail stores offer this — or a similar deal — to entice consumers to sign up for a credit card. Even though it may be tempting, many store credit cards aren’t as attractive as they seem.

Here’s why it’s best to avoid store credit cards.

High Interest Rates

Interest rates are the cost credit card holders pay for borrowing money using their credit card. This fee is typically tied to an annual percentage rate (APR) charged on an outstanding credit card balance. Store credit cards typically have higher interest, with APRs more than 25%. This means if you carry a balance on the card, that initial sign-up offer would be null and void, with no money saved.

Limited Rewards

Unlike regular credit cards that offer rewards — such as cash back on each purchase — store credit cards typically have much narrower reward parameters. Instead of receiving a percentage of cash back on some or all purchases, only in-store or full-price items may be eligible for awards (as examples). Additionally, some store credit cards extend deferred interest promotions that end up costing more if the card balance isn’t paid within the promotional period, in which case interest is retroactively charged on the entire initial purchase.

Reduced Use

Store credit cards such as Target and Amazon may enable wider purchasing opportunities such as for grocery, home, beauty care and other items. Retail credit cards don’t offer much flexibility in use.
Impacts Your Credit Score
Every time you apply for a new line of credit, it impacts your credit score. Applying for a store credit card is referred to as a “hard credit inquiry.” A hard credit inquiry can lower your credit score as much as 10 points, but even if it impacts your score by five points, that can be the difference between having “good” or “bad” credit depending on your current credit score.

Low Credit Limits

A low credit limit can negatively impact your credit utilization ratio, which is the amount of credit used relative to your total credit limit. This ratio is one of the factors that determine your credit score. Store credit cards typically have lower credit card limits, which means if you use the card more it raises the likelihood of harming your credit card score.

Alternatives to Store Credit Cards

Instead of a store credit card, there are several alternatives to consider. A secured credit card, for example, requires a cash deposit that works as your spending limit, preventing buildup of debt. A prepaid credit card or pay later service, such as Affirm, Afterpay and Klarna, break up total purchases into installments (usually four payments due every two weeks). They can also help safeguard from debt accumulation.

If you are struggling with credit card debt, a free Credit Counseling can help you get back on track.