Retail store credit card offers can be so tempting. The stores will tell you, by signing up for their cards and using them for your immediate purchases, you’ll be eligible for 10, or 20, or 30 percent discounts. Store credit card discounts and other perks you’ll be offered are real bargains. But credit experts tell us they very likely will cost you far more than you save in the long run.
Retail store credit card pros and cons
Retail store credit cards nearly always have high interest rates. The rates are typically between 20 and 30 percent, which makes the revolving balances very expensive. If you don’t plan to pay your balance before the end of the grace period each month, you’ll be facing some serious interest charges. Your purchases could end up costing double what you’d have paid using cash. This, of course, makes the initial discount you received on your first purchase pretty paltry in comparison.
Most retail store credit cards can only be used in that particular retail store. If your car breaks down and you need to pay for towing, your store credit card won’t help you. When you need to book plane tickets for your vacation trip, a store credit card is useless. If you want to make other purchases on credit you’ll need other credit cards even if you have a retail store credit card.
Often, when you apply for a retail credit card at the point of sale, you’re not given a full explanation of the terms and conditions before you apply. And if you are given a brochure with the credit card terms, you don’t really have enough time to examine the costs and compare them to other credit cards to be sure you’re getting a good deal. You should give thought to any major financial decision, especially opening a new account. With retail store credit cards, you’re not always given the opportunity to examine the pros and cons.
If you’re going to use the cards
If you’ve carefully considered store credit card pros and cons and still wish to use them, you should follow some careful practices. Department store and gas credit cards are acceptable for starting out because they help you establish good credit. But you should have no more than two department store and gas credit cards at any time. A lot of department store credit cards and gas credit cards promise gift certificates or cash back when you charge a certain amount of money. The fact is, you’ll probably save more than they give you in rewards by keeping your purchases to a minimum.
Retail stores constantly tempt you to spend when you hold their credit cards. You’ll frequently get incentives for spending, like discounts for cardholders, emails about sales, and even rewards on your spending. Many retail credit cards continually raise your credit limit, the more you charge on your credit card. But if you’re not disciplined with your credit card charges, you could easily find yourself with an out of control balance. Follow the rule of charging only what you can afford it and keeping your balance below 30 percent of the credit limit no matter how high your credit limit rises.
Timely payments are important for establishing a good credit history. When you make your payments on time, you avoid late fees and penalty interest rates. These types of credit cards have high interest rates that make carrying a balance costly. When you don’t pay your balance in full, a finance charge is added to your balance. Each time you pay a finance charge, you put money into the credit card company’s pockets that could have been going into your own.
It’s a good habit to only use your department store or gas credit card when your balance is at zero. Otherwise, you could easily find yourself with an out-of-control balance that can take months, or years, to pay off.
The impact they may have on your credit profile
Store credit cards can negatively influence your credit score. Just the act of applying for the credit card can put a dent in your credit profile. An application for a new credit card triggers a hard inquiry on your credit report, which can impact your credit score. The damage typically costs 10 to 30 points, according to experts.
An inquiry will stay on your credit report even if you never activate the card. Inquiries can remain on your credit reports for two years, though the FICO scoring model only looks at those from the last twelve months. Applying for a new card also lowers the average age of your accounts, which affects the length of your credit history — a factor that makes up fifteen percent of your FICO score.
The reduction in credit score can come back to haunt people who apply for loans the following year. People with borderline-excellent FICO scores of 750 or 760 might get bumped down to the next best rate — all because that store card application cost them points they couldn’t afford to lose.
Because store credit cards encourage high utilization, your credit score will drop more, the closer your balance gets to your credit limit. Store credit cards typically start out — especially if you have poor credit — with a very low credit limit — somewhere between $100 to $500. Your purchases could easily put you at a higher credit utilization than what’s beneficial for your credit. Any credit utilization over 20 percent is too high. Higher balances lower your credit score and are more difficult to pay off. On a card with a $300 credit limit, your balance should never go beyond $60.
In the end, retail store credit cards have less potential benefit for your credit score compared to major credit cards. A positive payment history will always help improve your credit score, but according to the credit bureaus, store credit cards simply don’t have as much influence on your credit score as major credit cards. One more consideration for your list of retail store credit card pros and cons.
Jeff writes about real estate, mortgages and homeownership.