I'm in my mid-20s, and I've never had a credit card. Whenever I'm shopping, I get offers for 15% or 20% off if I open a store credit card, but I've heard it's a bad idea to open one.
If I pay off the balance each month, is there really any risk to taking advantage of these offers to save extra money? And will a store credit card help me build credit?
Getting your first credit card is a pretty big deal. And it's usually best not to make major financial decisions because a slightly pushy salesperson is telling you you'll save six bucks on a pair of shoes.
Let's start by setting a goal: You need to establish a credit history, and a store credit card is one option for doing so. Any discount you get is a bonus and should not be the determining factor in what card you choose.
When you refer to store credit cards, I'll assume you're referring to closed-loop store cards, which you can only use at a certain retailer. Other store credit cards are co-branded with a sponsoring retailer but feature a Visa or Mastercard logo and can be used wherever credit cards are accepted.
Store cards can be good for credit newbies because the requirements to get approved are usually less stringent compared with regular cards. Payments are typically reported to the credit bureaus, meaning they'll help you build a credit history.
But wait! Store credit cards also have some serious drawbacks.
For starters, the interest rates are usually higher than what you'd pay with a regular credit card. The 2018 Retail Store Card Survey by CreditCards.com found that the average annual percentage rate (APR) for store cards is about 5 percentage points higher than for regular cards.
It can be tempting to ignore those sky-high APRs, though, because store cards often advertise 0% interest for the first six months or so. But here's where things get really tricky.
Often, that "interest-free" window isn't really interest-free; instead, it's deferred interest, where if you don't pay your balance in full by the end of the promotional period, you'll pay interest not just on what you still owe but on the entire amount you charged. So if you charged $500 and pay off all but $50 before the promotion expires, you'll owe interest on the entire $500.
You can avoid hefty interest payments by paying off your card in full each month, as you plan to do.
Another factor to consider is that store credit cards usually have lower spending limits than regular credit cards. Thirty percent of your credit score is determined by your credit utilization ratio — the percentage of open revolving credit that you're using — so carrying even a small balance on a store card can have a big impact.
Before you apply for a store credit card, be sure you've researched multiple options. In addition to considering cards issued by the retailers you frequent, search online for credit cards designed specifically for first-time credit card users, and check with your bank or credit union about their options as well. Compare APRs, annual fees and benefits across cards to determine what options are best for you.
Just know that with any credit card, the perks you receive — whether it's a discount, cash back, sign-up bonus or travel points — will quickly be erased the second you start paying interest or spending money you wouldn't otherwise.
Regardless of what option you choose, remember that this is a big decision. Opening a credit card now and using it responsibly will help you achieve bigger financial goals, like getting a mortgage or financing a car. So always pay your balance on time and in full, and you'll be on your way to good credit.
Robin Hartill is a senior editor at the Penny Hoarder and the voice behind Dear Penny. Send your questions about credit cards to AskPenny@thepennyhoarder.com.