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Think Twice About Store-Branded Credit Cards

Q. What are the pros and cons of opening store-branded credit cards for my holiday shopping?

A. The primary advantage is that familiar pitch you hear this time of year, especially when you're carrying an armful of gifts: "You'll save 10 to 15 percent off the day's purchases if you open a store credit account." You may also be told there will be no annual fee, special "cash back" rewards and notifications about sales down the road if you hold the store-branded card.

But before you sign up, recognize the potential pitfalls.

  • With interest rates as high as 25 percent, the one-day savings can quickly vanish — and then some — if you carry a balance. If the store card touts a "no-interest" period, consider the date that promotion ends and your likelihood of paying off any balance by then. If you don't pay, you could face steep interest charges dating back to the purchase date.

  • Many store cards are co-branded with a Visa, MasterCard, American Express or Discover logo for use outside the store. But you won't necessarily get generous rewards at other retailers. For instance, L.L. Bean's Visa card offers 3 percent back on Bean merchandise, but only 0.5 percent back elsewhere. And "cash-back" offers may not actually get you cash, but a coupon redeemable for merchandise at the store.

  • Your credit score might take a hit. Because store credit cards typically have lower credit limits than traditional plastic, they can hurt your credit utilization rate — the ratio between balances and credit limit. Also, getting many new cards at once can reduce the average "age" of your accounts, dinging your score. And multiple inquiries into your credit history (conducted by the cards' issuers after you apply) in a short period may also hurt.

The bottom line: Store-branded cards are great for loyal shoppers who pay on time and in full but even they should choose judiciously.

Among the best picks, according to ShopSmart, the sister publication of Consumer Reports:

  • Costco American Express, providing 3 percent cash back for restaurants and gas purchases up to $3,000 a year, 2 percent cash back rewards on travel, and 1 percent on everything else, with rewards redeemable at Costco.
  • Amazon Visa, offering 3 percent back on Amazon purchases; 2 percent at gas stations, restaurants and drugstores; and 1 percent elsewhere. Rewards are redeemable in cash, gift cards or Amazon points.
  • Target, giving 5 percent off at checkout but carrying a 22.9 percent interest rate for balances.
  • Walmart Discover Card, offering up to 1 percent cash back for every dollar spent at its stores.
  • Nordstrom Visa, providing two customer loyalty points for every dollar spent at its stores, and one point for purchases elsewhere. Big spenders can get perks such as free alterations, concierge services and tickets to fashion shows.

Sid Kirchheimer writes about health and consumer issues.

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