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If you’re planning to do some in-store holiday shopping this season, be prepared to hear plenty of offers to save an extra 10 or even 20 percent on your purchase by opening a new credit card. An additional discount sounds appealing, but these cards may not provide you much cheer once your statements start arriving.

A recent survey conducted by CreditCards.com revealed an average APR of 25.64% for credit cards from specific retailers. The average APR of all credit cards comes in at a much lower 20.82%. Let’s take a look at what those numbers mean, along with how they can impact your personal finances and when it might actually make sense to accept a store credit card offer.

How does APR impact your overall costs?

The best strategy for maximizing the rewards potential of a credit card is paying off your bill in full each month. However, most Americans aren’t using this strategy. In fact, the average American has $6,354 of credit card debt. For example, let’s say you fit perfectly into that average, but you really want to be debt-free. With a 20.82% APR, you’ll need to pay $591 per month for one year to pay off the amount. Your total interest charges will be about $739.

Now, let’s say that your $6,354 of debt is on an average store credit card. If you make the same payments each month to get debt-free in one year, your interest charges will clock in at about $917. Translation: The store wins.

(Photo by mixetto/Getty Images)
Photo by mixetto/Getty Images

Low Credit Limits

Then there’s the hit these cards can place on your credit score. Store-affiliated cards typically come with low credit limits. This can hurt what is known as your credit utilization ratio, one of the key factors in determining your credit score. This ratio, as its name suggests, measures how much of your available credit you are using. Using too much of your credit can hurt your credit score.

Chelsea Hudson, Bergen County, New Jersey-based personal finance expert at online shopping site TopCashBack.com, gives this example: Say you have a $1,000 credit limit on your store credit card and owe $300 on it. You are now using 30%  of your available credit on that card. That’s not good; Hudson says that you shouldn’t use more than 30% of your credit limit on any one card.

‘Emotional Spending’

Store cards are tempting, too, especially if you’re already inclined to overspend. Having a discount to your favorite store tucked in your wallet could encourage you to overspend and run up your debt. And when your credit card debt rises, that, too, could cause your credit score to fall.

“From card holder discounts to rewards, the temptation to spend is hard to ignore,” Hudson said. “If you’re not a disciplined consumer, you could easily find yourself carrying over a large balance that could cost you more in interest than you expect.”

Sha’Kreshia Terrell, Tyler, Texas-based founder and chief executive officer of personal finance site Humble Hustle Finance, said that credit card companies pay department stores to market their cards because people tend to buy based on emotion.

Say you enter a store with $300 in cash. The cashier offers you a 20 percent discount if you take out the store credit card. You calculate that you’ll save $60, so you accept the offer. You then put your entire order on the store card, leaving the cash in your pocket. Instead of using that cash to pay off your card, though, you spend it on something else.

This, Terrell said, is one common pitfall consumers make when first signing up for store cards.

Then when the balance comes due and you don’t have enough money to pay it off in full? Those high interest rates kick in.

Shot of a woman using her phone while shopping in a boutiqueYoung woman shopping in the city, legs and hands close up, carrying paper bags.Young woman shopping in the city, legs and hands close up, carrying paper bags.
Photo by ozgurcankaya/Getty Images

What is that bonus offer really worth?

Store credit card offers are built on answering a simple question: Would you like to save some cash today? Of course, the answer is yes. Everyone wants to save some extra bucks. If the purchase is big enough, that one-time bonus discount can prove to deliver a sizable benefit. However, it’s important to note that many of those appealing bonuses are capped. For example, if you open a Macy’s Credit Card, you can save 20% today and tomorrow, but the savings will not exceed $100. If you’re planning to purchase $500 worth of clothes and goods from Macy’s, this might make sense. You’ll be able to knock off a sizable chunk of your final bill. If you’re spending more (or less), it might not be worth the effort.

What will the long-term benefits mean?

While that $100 is certainly a nice perk, it’s important to comb through a range of other details that will matter after the one-time discount. Outside of understanding your APR, transaction fees and other essentials, you must think about the everyday benefits of using the card — not just the day you open the account. How often do you shop at the store? For example, if you’re constantly at Macy’s, that credit card can pay off with 10% rewards points on most purchases.

Does the card offer access to enhanced benefits? If you spend over a certain threshold on some cards, you may qualify for elite status with more savings opportunities. And how does the card reward the purchases you make at other retailers? This is the pain point with a lot of these cards; you may not be rewarded for spending elsewhere, or your points may only be good at that specific retailer.

So, is a store credit card ever worth it?

Depending on how you answer those questions, a store credit card can actually pay dividends. For example, the Target REDcard offers 5% off all purchases with the retailer, along with free shipping on most orders for card holders. Since Target sells basically everything, your savings can really add up throughout the year. If you’re looking for a card with more flexibility, you could consider the Amazon.com Rewards Visa, which offers 3 points per dollar spent at Amazon and Whole Foods, 2 points per dollar spent at restaurants, drug stores and gas stations and 1 point per dollar spent everywhere else.

There is one other situation when taking out a store credit card makes sense: If you need to boost your credit utilization ratio and you are also trying to repair a low credit score.

Store credit cards are usually easier to qualify for and are usually available to consumers with weaker credit scores. If you do qualify for one of these cards, the extra credit now available to you will lower your credit-utilization ratio.

Here’s how it works: Say you already have three credit cards with a total credit limit of $6,000 and you have $1,500 of credit card debt. Your credit utilization ratio is 25%.

If you open a store credit card with a credit limit of $1,000 and you don’t add any debt to it, you are now using $1,500 of a credit limit of $7,000 for a lower credit utilization ratio of about 21%.

These cards might also be a good fit for consumers who haven’t built much of a credit history because they are easier for these credit-challenged customers to get.

Michael Marsden, executive director and director of operations of DebtWave Credit Counseling in San Diego, said that this is the only reason he’d recommend that consumers apply for these cards.

“Store-branded cards can be a viable method to build or repair credit,” Marsden said. “Banks promise retailers high approval rates. A consumer not in the Tier-1 credit score club would likely be approved for a store-branded credit card. If used responsibly, a store card could improve your credit-utilization rate or build a credit history.”

The key is to not carry a balance on that card each month. If you want to use your store card, pay off what you charge in full each month. That way you won’t have to worry about the high interest rates.

Earning Points and Miles credit card online shopping
Photo by @chibelek via Twenty20

Bottom Line

Whether you’re comparing offers online or contemplating the offer in the checkout aisle, the key takeaway to remember is that all of the points, percentage discounts and sign-up bonuses don’t mean much if you’re carrying a big balance from month to month. For more insights on why you should aim to keep your balance as close to zero as possible, check out “Debunking Credit Card Myths: Does Carrying A Balance Help My Credit Score?”

Additional reporting by Dan Rafter.

Featured photo by Prathan Chorruangsak/EyeEm/Getty Images

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