Raise your hand if you’ve heard this line: “Would you like to save $25 on your purchase today?” I hear it almost every time I’m checking out at a store. What the cashier is really asking is would you like to sign up for a store credit card. Sometimes, the perk is a little better. Maybe they’re offering 15% off your entire purchase if you sign up right that moment. Before you sign up just for that discount, I would like to share with you some pros and cons of store credit cards. Hopefully, at the end, you’ll be able to decide if this type of card is right for you.
The Good of Store Credit Cards
Can help build credit
If you’re trying to build or rebuild your credit, you can more easily qualify for a store credit card than you can a traditional bank card. This is because stores want your business. If you have a credit card to their store, you’re more likely to shop there. Retail stores purposely set the barrier to entry lower. So, if you’re having a hard time getting approved for a regular credit card, you may be able to get a retail credit card. You can use the card sparingly to build up your credit score. Just make sure to pay your bills in full and on time. When your credit score is decent enough, you can move on to a better card with better rewards.
Special promos and discounts
Speaking of rewards, store credit cards often offer some ok perks, beyond that first $25. Target, for example, offers 5% off of every purchase if you use their Target REDcard. Some stores use points that you can use for future purchases, or you can get special financing with 0% interest for a certain amount of time. The type of perks you can get only if you have a particular store’s card vary too much to go into detail here. A retail store’s card may be worth getting if you shop at that store a lot. That leads us into the bad of store credit cards.
The Bad Of Store Credit Cards
Cards may only be able to be used at certain locations
A downside to store credit cards is, often, you can only use these store cards at certain locations. Open loop store credit cards are backed by Visa, American Express, MasterCard, or Discover and can be used anywhere. If you have bad credit, you may not be able to qualify for an opened loop credit card. People that can’t get approved for an opened loop card can most likely get approved for a closed loop store credit card. However, you can only use these cards at the retailer that issued it. If you’re getting a card just for the perks at every store you shop, that’s a lot of cards to carry around. If you need a card to build credit and want perks, just get a card at the store you shop at the most. Otherwise, see if you can qualify for a rewards card that can be used everywhere.
Credit applications can lower your credit score
Every credit card you apply for puts a small dent in your credit score and a mark on your credit report. Sure, if you actually end up getting approved for a credit card, the drop will be canceled out by your available credit increase. However, it takes a month or two for the new credit to show up on your credit report; I’ve seen credit inquiries affect my Credit Karma score immediately after a credit application. It only drops it by 2-5 points, but that can sometimes make a huge difference depending on your goals.
If you’re trying to get a mortgage loan, 2-5 points could mean the difference between paying $900 a month on your mortgage or $1000 a month. Mortgage companies don’t even like seeing a lot of credit inquiries when you apply for a mortgage. So, if you’re trying to buy a home, and a cashier glibly asks you if you would like to save $25, know that you could end up paying more in the future if you say yes.
The Ugly Of Store Credit Cards
Low credit limit
Retail credit cards usually have low credit limits. This is especially true if you have a poor credit history. Sometimes, the limit is $300. This isn’t a problem if you spend carefully and pay more than the minimum every month. However, low limits can make it easier for you to go over that limit. If you do that, you can end up paying hefty over the limit fees.
This low limit can actually lower your credit score. Credit utilization is the amount of credit you’re using out of your credit limit. Your credit utilization plays a part in calculating your credit score and is recommended to be below 30%. However, if you only have a $300 limit and you spend $150, you’re already over 30%.
The interest rates are high
Store credit cards have notoriously high interest rates. This post from Wallethub shows a card with 29.99% interest and a card with 16.99% interest (not the norm). According to CreditCards.com, The average interest rate for store credit card is 24.99% while a regular credit card is 16.15%. You can, of course, avoid this interest rate by paying off your balance in full. However, if you neglect to pay your store credit card in full, that can lead to a lot more money you have to pay.
Deferred interest credit cards
I’m sure you’ve seen the offers for store cards that advertise 6-month, 12-month, or 24-month special 0% financing. A majority of these store card use deferred interest. If you’re not careful, you can be hit with a huge interest charge all at once. Deferred interest cards are great if you need to make a large purchase and don’t have the money to pay for it, but you need to make sure your balance is paid in full before the end of the promotion period. If you don’t do this you will be retroactively responsible for the interest from the purchase date for the full amount. That means if you get 24-month financing and don’t pay your full balance in that time, you will be hit with 24 months worth of interest.
When that interest hits, it can often lead to an increase in your minimum payment. If you aren’t able to pay that minimum, you could end up missing payments. Then they tack on late payment fees and more interest. The next thing you know, you’re in debt like I was. Read about it here. Of course, that’s a worst case scenario that can easily be avoided by paying more than the minimum monthly payment.
Should you get a store credit card
There are pros and cons to store credit cards. Even low limit store cards are good if you’re trying to build a credit history. If you visit a particular store frequently, it could be worth it to get their card only if it offers great perks. Just don’t sign up for too many store cards (I believe one is enough) and make sure to always pay the balance off in full. I don’t recommend getting a store credit card just so you can save a one-time $25.
So, do you agree with my opinion on store credit cards? Did I get anything wrong or miss something? I’d like to know your opinion on store credit cards, so let me know what you think in the comments below. Thanks for reading.