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Applying for a Store Credit Card? Think Twice

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Paper or plastic? Cash, check or charge? Receipt in the bag or out? Briefs or boxers?

Getting grilled at the checkout counter has become the standard retail routine. (Admittedly, that last question isn't a typical line of inquiry... unless you're shopping for underthings.)

But one particular question tends to grab customers' attention: "Would you like to save 15% off your purchase today?"

These days, who wouldn't? Well … you, perhaps, considering the catch: To get the deal, you have to sign up for the store's credit card.

The "gotchas" of store credit cards
Remember, credit is fine (when not abused). Discounts are great (provided they're for something you were going to buy anyways). But combining the two can become a combustible situation, unless you really know how to play your cards right. Before you sign the dotted line, consider:

  1. Store credit/charge cards tend to carry higher interest rates than your standard-issue bank credit card -- think 20%-plus APRs. One month of carrying a balance, and you can kiss that sweet signup discount goodbye.
  2. Every time you fill out an application for credit, Big Brother knows. The application is noted on your credit report. While applying for a card tends to have a negligible impact (costing a couple of points or so), too many at one time can take your credit rating down a notch or two.
  3. Even if you use the card once, pay it off, and stash it in a sock drawer, that line of unutilized credit will factor into your credit score, as long as the account is considered open. Too much available credit can raise red flags with lenders, who may worry that you're a deadbeat customer who may decide not to pay them back someday.
  4. Even if you use the card and close the account right away, it'll linger on your credit report for at least seven years. That's not necessarily a bad thing; just be aware that frequently opening and closing accounts can look unattractive to the scoring system.
  5. Store credit cards do not carry the same dispute regulations as general-use credit cards. If you're not happy with your purchase, you probably won't be able to stop payment or enlist the lender to resolve the issue on your behalf.
  6. Though many store cards offer their own rewards programs for cardholders, amassing points (or Banana Bucks, or whatever Banana Republic calls its chits) may rob you of the airline miles or cash-back perks offered by the other cards in your wallet.

The bonuses of carrying a retail card
Store cards aren't all bad. The plusses, according to

  1. Store cards are easier to qualify for. If you're trying to build credit and have been turned down by a standard card, a store card can get you over the first hurdle of establishing creditworthiness.
  2. Since most store cards are serviced by major banks, they tend to report promptly to credit bureaus. Remember, no one is required to report credit activity to the bureaus, so sometimes the gossip is welcome -- particularly if you need someone to brag on your behalf.
  3. A lost or stolen store credit card is of limited use to a purse-snatcher. Their shopping spree is confined to that store's locations. As with any missing card, report the theft, pronto -- no matter how many Banana Bucks the thief is racking up on your behalf.

More tips on managing your credit:

Foolish personal finance expert Dayana Yochim is the author of The Motley Fool's Guide to Couples & Cash. The Fool's disclosure policy is fully charged.

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