Whenever you go for shopping, the store executive or sales clerk might ask you “Do you want to save an extra 25% today?" It’s nothing but a sales trick to convert you into a full-time store card holder.
Store credit cards are available at any store near you where you frequently shop. The moderately-expensive stores might give you approx. 40% off with additional discounts already applied on items.
But just because a store salesperson is offering you a lucrative discount to sign up on the spot, it isn’t necessary that you must do it immediately without giving it a thought. You need to understand why you should/shouldn’t open a store credit card in the first place.
Pros and cons of getting store credit cards
Let's have a look at the pros:
1. Create credit history
Store credit cards can be categorized into 2 different segments. a) Private-label retail cards , and b) Co-branded store credit cards.
a. Private-label retail cards
These are issued for using at the retailer's stores and are also sponsored by them. These cards are normally easy to get with low credit scores. People looking to establish or rebuild a credit history will find these cards useful. Retail store card issuers approve the applications of low credit score applicants, more than conventional credit card companies.
Why?
If you are a regular customer at a store, retailers don't want to hurt you by telling you that you've been rejected for a card. That means private retail cards may be used for building credit for people trying to establish credit.
b. Co-branded store credit cards
These are sponsored by the retailer but aided by one of the major credit networks like American Express, Visa, Mastercard, or Discover.
These cards can be used in any retail stores. Unfortunately, underwriting standards on co-branded cards are identical to traditional credit cards, so people having low credit score won't qualify.
If you use these cards for a long time, it’ll affect your credit score positively and help you raise your score. Using these store cards often and keeping statement balances low can reduce your debt-to-credit limit ratio, which makes up 30% of your credit score.
2. Special benefits
Both private and co-branded store cards would provide you a one-time sign-up discount and great rewards at any particular store or merchant. A co-branded store card might also give you base points with good point-earnings rate, for example - 1 point/$2. But you’ll miss these points if you shop and spend outside of the sponsoring store.
Some store credit cards have reward programs that’ll provide special benefits, such as bonus coupons, complimentary gift wrapping, waiver of shipping charges, financing offers, and so on.
In few cases, you can get your hands on a better combination of discount and rewards than you'd expect. But you must remember about the hassle and cost of opening/maintaining that card.
The cons of having a store credit card:
1. Your debts will be expensive
Signing up for a store credit card can be riskier. It is basically because of the APR on these cards tend to become high.
According to a report conducted by the creditcards.com, the average APR on America's largest retailers’ credit cards was 23.84% in 2016, which was much higher than the current national average APR (15.07%).
So, if you shop errantly, you might easily build up a huge credit card debt burden that you can't afford to pay off.
So, think twice before opening a store credit card and falling into a debt trap.
2. Effect on the credit score
Another important drawback of having a store card is the low credit limits available on these cards. The more you use these cards for buying things, the more your credit utilization ratio will increase. Thus, it could wind up hurting your credit score.
Finance experts would recommend that you should keep your credit utilization ratio as low as possible. It’s better to keep it below 20% - 30%.
Apart from the credit utilization ratio, you must also keep the number of hard inquiries low. Each time you want to open a store credit card, or even apply for it, it’ll also generate a hard inquiry on your credit report.
So, if you want to apply for many store credit cards from different retail stores within a short period, that would lower your credit score.
3. Affordability issues
It depends on how you’ll use the card. If you want to carry a balance on your card, you must look for a low-interest store card. If you like to buy from one particular retailer most of the time, and want to avoid any more hard inquiry on your credit report, a low-interest card will be very useful for you.
But, if you are more interested to get high discounts of your card, normally a high-interest card will fulfil your desire. High-interest store cards are generally bundled with attractive offers.
Make sure you read the terms and conditions carefully. Keep an eye on every details; for instance, if the card carries an annual fee, determine the go-to APR after the interest promotions lapse.
When people open these store cards, sometimes they might forget about it. Eventually, they’ll miss the payments too.
You could easily miss your first payment, incur late fees, interest and other important penalties. The missed payment could also hurt your credit score, about 70 to 90 points, depending on your current score.
So, considering the above pros and cons, you must decide if you should/shouldn’t open a store credit card.
Read more:
Credit card lost or stolen – What should you do in such a situation?
First Credit Card: 6 Tips to avoid high fees and interest rates