What a Good Store-Brand Credit Card Looks Like

By Matt Brownell

The list of questions you get asked at the checkout counter seems to grow every year. In addition to the standard “Did you find everything you’re looking for?”, customers may be asked to donate a dollar to a charity or hand over their email address to sign up for newsletters. But the most important question a cashier can ask you is this: “Would you like to sign up for our store credit card?” And millions of Americans are saying “yes” to that question. According to a recent report by Equifax, there are more than 175 million retail credit card accounts open nationwide, a 31-month high.

The card is usually packed with perks: Perhaps signing up gives you big discount on whatever you’re purchasing, and it may also give you percentage-off discounts on all future purchases. But like any credit card, these retailer-branded cards may have terms that can get you in trouble if you don’t understand them fully. Here are a few things to look out for if you’re thinking of signing up for one of these cards.

Consider the Rate

As with any credit card offer, you should consider the interest rate first and foremost. But that’s especially true of store-brand cards, which might be higher than you expect.

“If you’re a cardholder that tends to carry a balance, then you should be looking at the rate,” says Ruth Susswein, deputy director of national priorities with Consumer Action, a consumer advocacy nonprofit. “Generally, the rate tends to be a good bit higher. And if you’re someone who’s going to be paying the balance off over time, that matters.”

[Free Resource: Check your credit score and report card for free before applying for a credit card]

Credit.com personal finance expert Gerri Detweiler agrees that you’re likely to find the interest rate to be higher than what you’d get on a standard credit card from your bank.

“Every retailer card will fail the test if you compare the rate to what you could get with a regular credit card,” she says.

Susswein also points out that opening another credit card account will ding your credit score, especially if you already have so many open that it’s possible you’ll get denied. If you think there’s any danger of denial, or if you’re going to be taking out a mortgage in the near future, you’re probably better off passing.

Consider What Perks You Get

Store credit cards tend to have higher interest rates than the average card, and might hurt you in the long run by lowering your credit score. So why would you sign up for one?

The perks, of course.

The rate, and the kind of interest payments you’re likely to make if you carry a balance, should be balanced with the kind of deal¬† being offered by the retailer. A significant discount for opening the card, plus a recurring discount every time you use it at the store might make it worth it getting.

“If this is a place you shop regularly, it could be a way to get a regular discount,” Susswein says. If your card is giving you 5% off at that retailer every time you use it, then that’s better than the 1%-2% cash back you’ll get from your typical rewards card.

[The Credit.com Forum: Your Credit Questions Answered]

The more lucrative benefit, however, is likely to be the discount you get at the point of sale. Because this is usually a percentage-off deal, you’ll get the most benefit when making a big purchase.

“If you’re buying $100 of merchandise at a department store, that would not be enough to motivate me to open a new store card, but if you’re buying $5,000 worth of appliances, it’s a different story,” says Detweiler.

Understand 0% Financing Terms

One common deal attached to these credit cards is an offer of zero interest for an initial period, provided you use your card to buy a certain amount of merchandise for that period – for instance, putting $500 on the card within the first six months.

There are a few things to look out for with one of these deals. The most obvious is that you don’t want to put yourself in a position of needing to buy a bunch of merchandise you don’t need just so you can put off paying interest. And you should also make sure you establish whether or not you need to make minimum monthly payments during that period of time.

More importantly, though, is that the balance may be accruing interest in the background during that six-month period.

“You wont have to pay any interest if you pay off the purchase in full in the period,” says Kathleen Day, a spokeswoman for the centre for Responsible Lending. “They’re just hoping you’ll forget, at which point you have to pay all the interest [you’ve accrued].”

Play your cards right, and this is essentially an interest-free loan. Take the Home Depot card, for instance, which charges no interest if you spend at least $299 in a six-month period and pay it off in full; sign up for one, and you’re essentially giving yourself an interest-free loan for home improvement items (albeit one that needs to be paid off rather quickly).

But as the card’s terms¬†make clear, if you goof and let the interest-free period expire without paying up (or if you miss a minimum payment), you’ll suddenly get hit over the head with six months’ worth of interest. And as Day notes, the interest rate on that balance is often higher than what you’d pay on your normal credit card.

[Credit Cards: Research and compare credit cards at Credit.com]

Make Sure It’s a Credit Card

Not all retailer cards are of the credit variety. Sometimes they’re actually debit cards, and that means a whole different set of fine print to pore over.

Take the case of Jamie, whose story we recently told at Credit.com. Jamie took out a Target-brand debit card, which is linked to your checking account and offers 5% cash back when used at the retail chain. Unfortunately, she didn’t realise that the cardholder agreement automatically signed her up for overdraft protection, and when she used it without enough money in the bank, she wound up with a $30 insufficient funds fee.

Because the card was issued by a retailer rather than by a bank, federal laws didn’t prohibit Target from automatically signing her up for the service. The lesson? Whether the store is issuing you a debit or credit card, read the cardholder agreement carefully.

Of course, that’s not always easy to do when you have impatient shoppers waiting in line behind you at the store, which is why Detweiler says she typically isn’t crazy about signing up for cards at the point of sale.

“I’m not a fan of opening store cards on the spot, because it just doesn’t give you time to think through terms of the card,” she says.

This article originally appeared on Credit.com. Matt Brownell is a contributing writer for Credit.com.

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