NEW YORK (MainStreet) — If you went shopping on Brown Thursday or Black Friday this year, at some point you were probably asked to open a store credit card. It's a last-minute cash register decision that often seems too tempting to pass up — who wouldn't want to save 20% off the day's purchases or get a $100 in-store credit? Unfortunately, once you get past the initial incentive, store cards have a dangerous dark side. Here are five reasons you should avoid signing up for store cards this holiday season:
1. Higher interest rates
"In my experience, the interest rates for store cards are at least 6% higher than traditional credit cards," says William Waldner, an attorney in New York City. "So yes, you may save 10% off your purchase that day, but that will quickly be negated when you factor in the higher interest rate."
The current average interest rate for store credit cards is 23.72%, while personal rewards credit cards have an average interest rate of 16.08%, according to Alina Comoreanu, research analyst at WalletHub.com.
"If its an impulse decision to get the card, then it's going to be trouble," Waldner says. "If you want to go in, get the discount, and then pay off the balance immediately, then it's not a horrible decision. But you have to be strategic."
Waldner says that many of his clients have ended up paying three times more for items bought with a store card due to the high interest rates.
"I've seen those charges start out at $1,000, but you may end up spending $3,000 by the time you pay it off. It just doesn't make sense. The stores know you're going to go in and buy a bunch of stuff, and then they're going to generate a fortune from you as you try to pay it back."
2. Limited perks
Read the fine print. That 20% off discount may only be valid for 24 hours. After that, what will you get?
"After that initial discount they almost never offer anything else," Waldner says.
Although most store cards offer coupons sent to you throughout the year, the deals are often no better than any other sales the average shopper has access to, he says.
"They're fake. You'll get the same discount if you just ask," he says.
Also, rewards offered by store credit cards are redeemable only for merchandise from the respective store and aren't as lucrative as those offered by traditional rewards cards, Comoreanu says.
"Often the rewards offered by store cards are not an actual steady rewards programs, but just discounts users can apply to in-store purchases occasionally," she says. "These discounts almost always come with a cap, for example, up to 20% discount for a maximum amount of $100 back."
If you plan to sign up for a store card to get that initial discount, make sure to research all promotions the card offers, says Adam Levin, chairman and co-founder of Credit.com.
"You may be able to find coupons or coupon codes on the retailer's website or through email and social media promotions, without having to open up a new account," he says.
3. You'll spend more
"You may be lured in by the instant savings, but you may end up spending more because sometimes the new account discount will extend to purchases made within a limited time frame, encouraging you to binge shop to get the discount," Levin says. "You run the risk of spending more, instead of saving money."
Department stores will be aggressively offering store cards throughout the holiday season, Waldner says. They know that people are looking for discounts wherever they can find them.
"If you walk into store and they offer you a store-specific card, you're going to spend a lot more than if you just have a regular MasterCard or AmEx," Waldner says. "When you're holding onto a specialty card, it's easy to feel obligated. Customers feel like they've been handed access to money when they're told they get that discount."
4. Credit report concerns
One of the dangers consumers don't expect to run into when holiday shopping is a negative effect on their credit, Levin says. But it can happen.
"When opening a department store credit card, you may see a dip in your credit score because an inquiry is created when the card issuer checks your credit score," he says. "Also, if you fall behind on payments this can hurt your credit."
Applying for a store card is just like applying for any other line of credit. It's not a gift card or a prepaid card — if you use the card and don't pay it off, it's going to reflect negatively on your credit report.
5. Traditional cards offer real rewards and incentives
Unlike store cards, traditional credit cards offer lower interest rates, rewards programs and fraud protection, Levin says. Most traditional cards also offer free insurance on car rentals and purchase protection for certain items.
"If you want frequent-flier miles or cashback rewards, then you need to rely on a traditional card," Waldner says. "All you're going to get with a store card is a discount on clothing or electronics. Any benefit you receive is contingent on you going back there and shopping. They're basically trapping you in their store."
— By Kathryn Tuggle for MainStreet