3 drawbacks of store credit cards

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NEW YORK (AP) — Apply for a store credit card and get an instant 20 percent discount on your purchase.

It sounds like a no-brainer, especially during the holidays when you’re making big purchases. The sales clerk will also tempt you with promises of advance alerts on special promotions and year-round deals. Yet opening a store credit card can come with repercussions and it’s a decision that shouldn’t be made in the spur of the moment.

Before you start shopping, here are three aspects of store credit cards to consider:

Higher Interest Rates

The interest rates on retail credit cards tend to be higher than those issued by banks. The Macy’s credit card, for example, charges 25 percent interest and the Walmart credit card charges 23 percent. By comparison, the average rate on cash back credit card is about 16 percent, according to Bankrate.com.

So if you tend to carry a balance, the financing charges on a store credit card over the long term will eat into any savings you achieve initially.

Credit Score Impact

Opening a new line of credit can also hurt your credit score. The exact impact will vary depending on other factors in your profile, but it could nick as much as 25 points off your score, according to FICO, which develops the most widely used credit scores. That’s based on a range from 300 to those with poor credit, to 850 for those with excellent credit.

Scores typically recover from new account openings after about three to six months as long as you make payments on time and don’t open any other accounts.

Store-branded credit cards also tend to have lower credit limits. This matters because the portion of your credit line that you’re using is a factor in your score; the closer your balance is to the credit limit, the more your score suffers.

Spending Temptation

In addition to the discount for opening an account, stores send cardholders special deals throughout the year. That’s great if you’re already a regular shopper at the store. But the barrage of offers may also prompt you to spend more than you might have otherwise.

So if you’re budgeting for the new year, you might not want to invite the extra temptation.