The Hidden Costs of Store Credit Cards

Today's guest post comes from Justin McHenry, president of IndexCreditCards.com. You can also listen to an Alpha Consumer podcast with McHenry here.

Doing our part to kick-start the economy, my wife and I went shopping for a new couch last week. With our kids recently past toddlerhood and (hopefully) beyond gouging or slobbering on every piece of furniture in the house, we were ready to go a bit more high-end. We were still watching the cost, though, so when we found our couch at Macy's and the salesman asked if I'd like to open a charge account to save $100, I was tempted. (Technically, it was supposed to be 10 percent off, but the discount topped out at $100.)

One hundred dollars is not an insignificant amount of money, especially with holiday shopping also on the agenda. But, after much tortured debating (both inside my head and between me and my wife), I passed on the card.

Why? Two reasons—and I believe they are reasons that anyone considering the high of a one-time discount should consider before applying for a store credit card:

• Interest rates on most retail credit cards are through the roof. Macy's store credit card charges a 22.9 percent interest rate. But I'm not picking on them in particular—they are not alone. Many department store and retail credit cards charge significantly higher rates than general-purpose credit cards (which currently average a 14.39 percent rate). If you don't pay off your purchase immediately when the bill comes, that inflated interest rate leads to finance charges that quickly eat up any upfront savings you enjoyed.

• Opening up new lines of credit can hurt your credit score, costing you money in the long run. While there is nothing wrong with credit if you use it wisely, having too many credit cards can be a red flag to the financial wizards who calculate your credit score, which is used to determine your interest rate on loans or lines of credit in the future. This is especially important in the current environment, when credit is tight. You don't want a 15 percent discount on new boots today to stop you from getting credit when you really need it, or to lead to higher interest rates because your numerous open lines of credit make you look risky.

While I turned down the latest offer that came my way, I admit I've gone for the short-term store card discount in the past. What always made me unhappy in the end was the fact that I opened a new line of credit for a card that could only be used at one store. Thankfully, many retailers, such as Target, Nordstrom, and others, have seen the writing on the wall. They've paired up with Visa, MasterCard, American Express, or Discover to offer credit cards that reward their customers while giving those customers the freedom to use the cards almost everywhere they shop.

In this holiday season when money's tight for just about everyone, it will be especially tempting to take retailers up on their offers for new card discounts. I won't discourage you from saying "yes," but I hope I've given you some insight into why you might say "no."

Have you had a good experience with store credit cards? Or a bad one?