Avoid Store Credit During the Holidays

It's the holidays, and nothing embodies the spirit of the season like shopping.

Holiday shopping spans the whole spectrum: gifts to give, the tree to place them beneath, lights to string around the tree and across the front of the house. The stores you're most likely to get these products at – big box retailers, hardware stores and local shops – will often try to entice you to sign up for a store credit card, usually using the carrot of quick financial relief through seasonal discounts to generate buy-in.

Even when you're against the proposition, it's common to cave. The News Journal of Delaware cited a study finding some consumers felt bullied by a cashier into applying for store credit accounts, while others eventually gave in and signed up.

While store credit offers quick savings to enjoy in the holiday shopping spell, the long-term consequences often outweigh any short-term benefit

Damage to Credit Score
One fact of applying for and opening store credit is it may lead to a drop in your credit score. Store credit is treated as any new line of credit would be, and an inquiry is made to a credit bureau and will be reported in your credit history, which can negatively impact a score. When possible, as in the case of opening a line of store credit, any such hit to your score should be avoided. Even a basic inquiry can lead to further credit damage down the road, The News Journal of Delaware noted. Consumers are often then liable to fall behind on payments because of complex policy and payment guidance from the store, and may hurt their score through unpaid bills or a too high utilization rate.

Higher Interest Rates
Retail credit accounts are burdened by higher interest rates than attached to nonstore cards. A CreditCards.com survey from this fall found the average APR for credit cards from America's largest retailers was 23.33 percent, 8 points higher than the rate for general-purpose cards.

It's nothing new for store-specific credit cards to carry higher interest rates, but the growing chasm means you're paying more, and any savings enjoyed during holiday shopping will likely be undercut.

"In my experience, the interest rates for store cards are at least 6 percent higher than traditional credit cards," William Waldner, an attorney in New York City, told MainStreet. "So yes, you may save 10 percent off your purchase that day, but that will quickly be negated when you factor in the higher interest rate."

Tangled Rewards Systems
A major incentive for store credit is the reward systems. Customers likely to open store credit are loyal customers or at least on the the path and figure each purchase that earns them something is value added. However, the complicated labyrinth of store reward systems are increasingly confounding and frustrating to users.

The CreditCards.com survey found increased usage of tiered rewards programs by large retailers spurred engagement, but toed the line of becoming so confusing as to alienate customers. The highest levels of the tiered programs offer the grandest rewards, but the money that needs to be spent to get you there can evolve into a habit of reckless spending and further harm your credit score and financial situation.

While the evidence now seems to point in every way other than a store credit card, knowledgeable use of store credit by a savvy consumer who can close accounts in enough time to enjoy savings and prevent future obligation and debts may work. Still, it's important to heed the real consequences of store credit.

"Once interest charges are applied toward the account, any potential rewards, bonuses or discounts earned could be quickly negated and you could end up paying much more in the end for the purchase," credit counselor Jonathon Gideon told CreditCards.com. "You don't have to avoid the cards, just be careful."