Department store credit cards:  Are they the very best way to buy or a disaster of epic proportions just waiting to happen?

All told, they probably fall somewhere in between those extremes.  Overall, however, store credit cards aren’t the best way to handle consumer purchases and most of us would be wise to pay off any store accounts we have and to swear them off forever after.

Store cards might sound like a good idea when the cashier tells you that you can save 15% on your purchase if you apply right that very second.  But remember, businesses don’t keep the lights on because by hurting their bottom line.  That discount may look like a great giveaway to the consumer, but that isn’t necessarily the case.

Why?  There are a few reasons.  First, research shows that people who use plastic spend more than those who use cash.  The stores know that and they want you to spend more.  Thus, they alleviate the pain involved in handing over real money by giving you a handy-dandy card.  Second, these cards generally come with interest rates so high that they guarantee profitability for the store regardless of whatever up-front discount they might use as a sign up inducement.

And those interest rates are probably the number one reason to avoid store-issued plastic.  They often reach levels as high as 20% and they may come with an assortment of other sneaky fees and expenses, making them incredibly expensive to maintain if you aren’t clearing your balance almost instantly.  Before you say, “that’s what I’d do,” ask yourself why you’d even consider financing a purchase if you had the cash available in the first place.

There may be two exceptions when it comes to avoidance of store credit cards.  Store credit is usually easier to get than bank credit.  Macy’s is probably more generous in terms of approvals than American Express.  That makes department store credit cards an option for those with no credit history who are looking for a way to demonstrate that they can be responsible credit users.

It also serves as a way for those who have significantly damaged their credit rating to start rebuilding a record demonstrative of reform and responsibility.

If you fall into one of those two groups, you might want to look into a store credit card.  However, you need to understand the best way to handle an account if you open it.

Latoya Irby from About.com does a nice job of laying out a responsible approach to department store card use.  She recommends limiting the number of cards, keeping balances at no more than 20% of the credit limit, paying balances on time and in full, and never making additional purchases until you’ve zeroed your balance.  If you approach a store card with this perspective, it may be possible to use it to your advantage if you fall into one of those two narrow categories.

Most of us, however, are better off politely declining that discount opportunity at the checkout counter.  We should be paying with cash.  If we are forced to use credit, we’ll be much better off using a bank-backed credit card with a better interest rate than the store-sponsored alternatives.

Department store credit cards can be very attractive–especially during this time of year when we can be very tempted to go over-budget in order to finance more holiday spending–but when you run the numbers and look at the massive interest rates associated with their use, store cards just don’t make a great deal of sense.  The better solution, as is so often the case, is to live within your means.