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We’ve all been there: While checking out at your favorite retailer, the salesperson asks if you would like to sign up for their in-store credit card and save 10% to 20% on today’s purchase. As you glance down on your heaping merchandise pile, you do a rough estimate of how much you can save and the card is tempting, especially for college students and post-grads trying struggling to make ends meet.

“Oftentimes, that is a great venue for these 18 or 19 year-olds to be able to start establishing credit, but they have to be very careful about it, just like all of us do,” says Kimberly Foss, personal finance expert and founder of Empyrion Wealth Management.

Despite regulations like the CARD Act that are intended to make younger consumers more cognizant about the importance of a healthy credit history, credit card debt remains a top issue with college students.
According to a 2009 study conducted by Sallie Mae, the average credit card balance increased to $3,173, the highest in the years the study has been conducted, and 21% of undergraduates had balances of between $3,000 and $7,000.

“We have kids coming out with credit card debt that could even be as high as 15 to 20% of their student loan debt and to graduate with another $10,000 in credit card debt is insanity,” says Phil Ciopppa, managing principal and chief investment officer of Arbol Financial Strategies, LLC. “We have this rise of people in their 20s now declaring bankruptcy—it’s a not a good way to start your life.”

We talked to financial and credit experts about what young consumers need to keep in mind about signing up for in-store cards and how an account can affect their financial future.

Disadvantages

While the discounts that come with opening a card are enticing, an in-store card could have consumers paying more in the long run, warns Cioppa.

“If you don’t pay that off in the 18-month period and you go into just [making] periodic payments, you’re paying at least 40% more for that same item,” he says. “In the end, you’ve lost 30% more of your money because you used their credit card.”

The experts say that some cards can have the maximum interest rate allowed by law (up to 29.99%), and that the balance limits are low, which can affect users’ credit history if they are carrying a high balance.

“When you look at factors that go into your FICO score, credit card limit is a pretty big factor because if you’ve got a couple of cards and then you have this store card and let’s say the limit is only $300, that can actually bring down your utilization ratio,” says Beverly Harzog, credit card expert at Credit.com.

Additional impact on your credit history

According to Foss, the inquiry performed on a potential cardholder’s credit history every time they apply for a new credit card account can lower a credit score.

Cioppa explains that consumers need to keep in mind that although different traditional credit cards report to different agencies, in-store credit cards usually report to all three.

“You’re lowering your credit score three times,” he says. “If you go for a mortgage or a car loan, they take the middle score and your middle score will be lower.”

How you can be smart about applying for an in-store card

It is possible for college students to reap the benefits of some money-saving promotions and deals with an in-store credit card, especially if it’s a store they frequent. Harzog recommends that instead of signing up right at the register, students should take the application home and read the fine print.

“Check the grace period, see what the APR is, but [know] it’s going to be fairly high no matter what store,” she says. “[If] you know that you won’t carry a balance, that’s the only situation where I could see this working for someone.”

For students that already have an in-store card but no longer use it or want it, the experts recommend paying off the entire balance and leaving it open.

“If you’re 40 years old and you had a Gap card when you were 20 years old and it’s still on your account, it may not be reported, but the fact of the matter is that 20 years later you can resurrect that and that will actually help to increase your credit score,” says Foss. “You don’t want to shut these down necessarily because that may [negatively] impact your credit score.”

The experts recommend that students and grads check their credit score and what’s on their account every year through AnnualCreditReport.com.